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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
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OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1999
OR
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 333-59393
RHYTHMS NETCONNECTIONS INC.
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(Exact Name of Registrant as Specified in its Charter)
DELAWARE
(State or Other Jurisdiction of Incorporation or Organization)
33-0747515
(I.R. S. Employer Identification Number)
6933 South Revere Parkway
Englewood, CO 80112
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(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, Including Area Code: (303) 476-4200
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act: COMMON STOCK,
$.001 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period as the Registrant was
required to file such reports) and, (2) has been subject to such filing
requirements for the past 90 days.
(1) Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form-10K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of voting common equity held by non-affiliates of the
Registrant was approximately $2,642,913,141. This calculation is based upon
the average bid and asked prices of such common equity on February 29, 2000 of
$36.44, and the number of shares held by non-affiliates, which was 72,527,803
shares on December 31, 1999. The number of shares of the Registrant's $.001 par
value Common Stock that was outstanding as of December 31, 1999 was 78,255,707.
DOCUMENTS INCORPORATED BY REFERENCE:
The information required by Part III (Items 10, 11, 12, and 13) is
incorporated by reference to portions of the issuing definitive proxy statement
for the 2000 Annual Meeting of Stockholders which will be filed with the
Securities and Exchange Commission within 120 days after the fiscal year ended
December 31, 1999.
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PART 1
Item 1 - Business
All statements contained herein that are not statements of historical fact
constitute "Forward-Looking Statements" within the meaning of Section 21E of the
Securities Exchange Act. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors that could cause the actual
results of the Company to be materially different from historical results or
from any future results expressed or implied by such forward-looking statements.
Readers are urged to consider statements that include the terms "believe",
"belief", "expects", "plans", "anticipates", "intends" or the like to be
uncertain and forward-looking. Forward-looking statements also include
projections of financial performance, statements regarding management's plans
and objectives and statements concerning any assumptions relating to the
foregoing.
We are a leading provider of broadband local access communication
services to businesses and consumers. Our services include high-speed, "always
on" connections to the Internet and to private networks. We also offer a growing
suite of network features and applications including Internet services that
bring added value to our service offerings. We use multiple Digital Subscriber
Line (DSL) technologies to provide data transfer rates ranging from 128 kbps to
7.1 Mbps delivering data to the user and from 128 kbps to 1.5 Mbps receiving
data from the user. Accordingly, we believe that our peak network transfer rates
to and from the user are higher than those of other national DSL service
providers. For customers that subscribe at the 7.1 Mbps rate, our network
provides data speeds to the user up to 125 times the speed of the fastest dial-
up modem and over 55 times the speed of integrated services digital network
(ISDN) lines. We believe that our Internet Protocol (IP)-over-DSL network
capability is unique compared to other national DSL service providers because it
allows us to provide a broader range of IP internetworking capabilities in a
simpler, more cost-effective way than those offered by traditional networking
alternatives.
Our customers include Internet service providers (ISPs), telecommunications
carriers and broadband communication services resellers, which we refer to as
broadband service providers. We also sell to businesses or enterprises that are
not otherwise served by our broadband service provider customers. Internet
service providers and broadband communication services resellers typically
purchase our services in order to provide high-speed Internet access to their
business and consumer end users. Telecommunications carriers typically purchase
our services for resale to their Internet service provider affiliates and
business customers. Enterprise customers typically purchase our services
indirectly from our telecommunications carriers or directly from us to provide
employees, branch offices and other affiliates with high-speed remote access to
the enterprise's local and wide area networks.
We believe we have one of the nation's largest DSL networks with over 1,200
built or operational collocation sites in incumbent carrier central offices
providing access to approximately 30 million homes and businesses as of December
31, 1999. As of December 31, 1999, we had approximately 12,500 DSL lines in
service and were providing service to approximately 1,500 broadband service
providers and businesses. Our broadband service provider customers include MCI
WorldCom, AT&T, Qwest, Level 3 Communications, Williams Communications,
Intermedia Communications, UUNET, Microsoft Network, Flashcom, PSINet, SAVVIS
Communications, CAIS Internet, Telocity, Phoenix Networks, Digital
Island/Sandpiper Networks and iPhysicianNet. Our enterprise customers include
Cisco, Ford Motor Company and SGI, among others. We believe our higher data
transfer rates, combined with our network features and applications, allow us to
record the highest average revenue per installed line per month among national
DSL service providers. From our inception in February 1997 through September 30,
1999 our average revenue per installed line was approximately $131 per month.
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As of December 31, 1999, we offered our services in 38 markets and 67 of
the largest metropolitan statistical areas (MSAs) in the United States, of which
there are 314 total. We expect to complete the initial build-out of our network
by the end of 2000. At that time we anticipate that our services will be offered
in 70 markets and 108 MSAs, and our network will pass a total of 51 million
homes and businesses, representing approximately 45% of U.S. homes and 50% of
U.S. businesses.
In addition to our high speed access services, we plan to offer an
increasing variety of network features and applications such as voice-over-DSL.
We believe these new services are important to increase our revenue. First,
these services expand the size of our addressable market by enhancing and
enabling new broadband services, such as video streaming, that cannot be
practically achieved with narrowband communications connections. Second, certain
of these services require higher speed connections that may result in higher
average revenue per installed line per month for us. Third, some of these
services may contain additional network features and applications that may
provide us with additional recurring monthly revenue from our communication
services resellers and business customers.
To further our goal of offering network features and applications, we
expect to continue to enter into business arrangements and trials with broadband
service providers, such as our arrangements with Digital Island/Sandpiper
Networks, as well as telecommunications carriers, such as our arrangements with
MCI WorldCom and Level 3 Communications, and leading networking equipment
providers such as our arrangements with Cisco.
We intend to continue to explore expansion of our DSL network both in the
United States and internationally. In October 1999 we invested $5.3 million in
OCI Communications Inc., the parent company of Optel Communications Corporation,
a competitive local exchange carrier in Canada. This investment was made in
connection with our establishing a joint venture company, Rhythms Canada, with
Optel in January 2000. Rhythms Canada is expected to develop a Canadian DSL
network and offer dedicated high-speed DSL services to enterprise customers and
telecommunications carriers throughout Canada.
Market Opportunity
Growing demand for broadband local access communications services
Demand for broadband local access communication services is growing at a
rapid rate as the use of the Internet, intranets and extranets increases.
Industry experts believe that by 2003, 55% of all enterprises in the United
States and 71% of all home-based businesses in the United States will be on-
line.
To remain competitive, small and medium-sized businesses increasingly need
high-speed Internet connections to maintain complex web sites, access critical
business information, communicate more effectively with employees, customers and
business partners, and participate in the rapidly growing e-commerce market.
According to industry analysts, Internet commerce revenue in the United States
will reach $556 billion by 2002.
Today, business spending for connecting remote workers, branch or affiliate
offices and corporate headquarters to each other and to customers, suppliers and
partners either through the Internet or private networks is large and growing.
Much of that growth will be driven by enterprises seeking to find a cost
effective way to make their remote workers, offices and affiliates as productive
as those who have access to all of the high performance communications and
networking resources available to workers located at the corporate headquarters.
Today, a record number of households use the Internet for e-mail,
information, entertainment and shopping. Increasingly, consumers are demanding
high-speed remote access
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connections. According to industry analysts, the number of U.S.
residential subscribers to high-speed Internet access services should grow to
3.3 million by the end of 2000, and 16.6 million by 2004, up from 1.4 million at
the end of 1999.
Rapid adoption of new applications and services that are enhanced or
enabled by broadband access is expected to further fuel the growth in broadband
local access communication services. Collaboration services, such as video
conferencing, are expected to grow rapidly, as are video and audio streaming
services. Industry experts project that revenues from video services will
increase from $469 million in 1998 to approximately $1.6 billion in 2002.
Broadcast programming and on-line shopping are expected to grow dramatically in
the consumer market.
The trend toward convergence of voice, data and video services over a
single, broadband, multimedia Internet Protocol network should further fuel the
demand for broadband local access communication services. Historically,
telecommunications service providers offered multiple, single purpose networks
to deliver a range of voice and data services. Increasingly, small businesses
and consumers will be able to purchase a full range of local and long distance
voice services and features, Internet access services and video services over a
single, cost-effective, high-speed DSL connection. Communications industry
researchers project that by 2005, almost 25 million lines of voice-over-DSL will
be deployed worldwide - with about one third of these lines being deployed in
North America.
DSL is a cost-effective technology for broadband local access communication
services
We believe that traditional network alternatives are inadequate and
costly as compared to DSL. Only a fraction of buildings in the United States are
currently connected to high-speed fiber networks - typically large buildings in
metropolitan areas, or clusters of buildings in regional campus parks.
Consequently, the vast majority of connections to the Internet or private data
networks are through slow, dial-up modems connected to the traditional circuit
switched public telephone system. The data carrying capacity of the fastest
commercially available dial-up modem is only 56 kbps, and the capacity of
another alternative, ISDN, is only 128 kbps.
DSL technology dramatically increases the data, voice and video carrying
capacity of standard copper telephone lines. Our peak data transfer rates range
as high as 7.1 Mbps which is up to 125 times the speed of the fastest dial-up
modem and over 55 times the speed of ISDN lines. We anticipate that continued
advances in semiconductor technology will continue to increase peak data
transfer rates, and that equipment prices will decline as DSL technology
continues to be broadly deployed.
DSL services are generally favorably priced relative to other available
alternatives, and can be less complex to order, install and maintain.
Traditional T1 frame relay and private line services are considerably more
costly than a DSL service, as are heavily used ISDN services that are priced
based on usage. Consumer class DSL services generally are priced competitively
with cable modem services.
Because DSL technology uses existing copper telephone lines, a broad
network deployment can be implemented rapidly and requires a lower initial fixed
investment than some existing alternative technologies, such as fiber, cable
modems, wireless data and satellite data communications systems. A significant
portion of the cost of building a DSL network is directly related to the demand
of paying subscribers, resulting in a success-based deployment of capital.
Packet-based networks often are more efficient than traditional
point-to-point networks, and allow end users to connect to any location that can
be assigned an Internet Protocol address. Traditional point-to-point networks,
including the traditional telephone networks and private line networks, are less
efficient because they require a dedicated connection between two locations.
Packet-based networks allow multiple users to share connections between
locations.
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Favorable regulatory environment exists for new broadband local access
communication providers
The 1996 Telecommunications Act allows competitive carriers to leverage the
existing incumbent carrier infrastructure, as opposed to building a competing
infrastructure at significant cost. The 1996 Telecommunications Act was designed
to create an incentive for incumbent local exchange carriers that were formerly
part of the Bell system to cooperate with competitive carriers. These incumbent
local exchange carriers cannot provide long distance service until regulators
determine that the incumbent local exchange carrier has met a "checklist" test
showing that it is meeting the Act's requirements in opening its network and
markets to competition. The 1996 Telecommunications Act requires traditional
telephone companies, among other things:
. to allow competitive telecommunications companies to lease copper
telephone wires on a line-by-line basis;
. to provide central office space for the competitive telecommunications
companies' DSL and other equipment used to connect to the leased
copper telephone wires;
. to lease access on their central office fiber backbone to link the
competitive telecommunications companies' equipment; and
. to allow competitive telecommunications companies to use their
operational support systems to place orders and access their databases.
The FCC, in interpreting the 1996 Telecommunications Act, has emphasized the
need for competition-driven innovation in the deployment of advanced
telecommunications services, such as DSL services.
Our Competitive Strengths
We offer an attractive value proposition compared to alternative local access
communications services
For end users that subscribe at the 7.1 Mbps rate, our network provides
transfer speeds over 55 times the speed of ISDN lines at monthly rates similar
to or lower than those for heavily used ISDN lines, and over four times the
speed of T1 private lines and frame relay circuits at a substantially lower
price. Because we use dedicated connections from each end user to the network of
our broadband service providers and business customers, end users can receive
dependable data transfer rates and reduce the risk of unauthorized access.
Unlike dial-up modems and ISDN lines, the DSL solution is "always on," and
provides 24 hour continuous connection. Users are not required to dial-up to
connect to the Internet or their local area network for each use. In addition,
our DSL network has been designed to allow us, for certain customers and
services, to proactively and continuously monitor our network to the end user's
DSL modem or router, eliminating the need for the end user to initiate a report
of network malfunctions, as is the case with dial-up modems or ISDN lines.
Our network has been designed to be flexible and easily upgradeable to support
new network features and applications
Our network has been designed from the outset to be flexible and
upgradeable to support new network features and applications. Because our
network utilizes multiple technology platforms, we can provide higher end user
speeds than other national providers, a broad range of IP internetworking
capabilities in addition to traditional virtual point-to-point connectivity and
various types of network traffic, including data, voice and video.
The quality and characteristics of each end user's copper telephone wire
are different. Because we use a variety of technologies we are able to select a
solution that provides the highest
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speed available for each end user. As a result, as of December 31, 1999, users
on our network were capable of receiving average data transfer rates of nearly
1.9 Mbps.
Our network supports traditional transmission protocols such as
Asynchronous Transfer Mode and frame relay, as well as the rapidly growing IP
transmission protocol. Our IP over DSL network capability allows us to provide a
broad range of IP internetworking capabilities in a simpler, more cost-effective
manner compared to traditional protocols. For example, our network can give each
user simultaneous access to the Internet and private networks using a single
connection, the ability to take advantage of distributed content caching
services in an internetworked environment, and the ability to add other emerging
IP services such as voice-over-IP using their existing connection.
Our network has also been designed to support multiple types of network
traffic, starting with data and expanding to voice applications, including a
variety of voice-over-DSL technologies, and video applications, including
conferencing and streaming. Our network can also be easily upgraded, as it has
been designed to incorporate new applications and features, thereby avoiding
costly and time consuming network upgrades.
We have leveraged our early mover advantage to rapidly expand our dense,
national network and grow our number of lines in service
We were among the first to widely roll out national DSL services, offering
commercial services in our first market in April 1998. This early start enabled
us to rapidly expand our network to our targeted markets and develop early
relationships with customers requiring a dense, national footprint. Because our
initial network footprint in each market or MSA is extensive in coverage, we
typically are able to make our services available to at least 70% of our
customers' end user homes and businesses.
We have been able to establish customer relationships with recognized leaders in
the networking industry
We currently have strategic and/or customer relationships with many of the
major interexchange carriers and fiber backbone providers including MCI
WorldCom, AT&T, Qwest, Level 3 Communications, and Williams Communications. We
also have customer relationships with many of the leading national business and
consumer ISPs, including UUNET, Microsoft Network, PSINet, SAVVIS, Flashcom,
Telocity and Phoenix Networks. MCI WorldCom has designated us as their preferred
provider in its alternative carrier access provisioning system for DSL services
in certain circumstances. MCI WorldCom and Qwest together have committed to
purchase an aggregate 200,000 lines over a seven year period subject to
penalties for failure to reach target commitments. Under the terms of our
strategic partnership with Cisco, Cisco has agreed to jointly market and sell
our networking solutions to its customer base in conjunction with our
telecommunications carrier customers and engage in joint development projects
with us, including voice-over-DSL and video streaming applications.
Our management team has extensive experience
Our senior management team has extensive experience in developing next
generation networking businesses, including:
. Catherine Hapka, Chairman of the Board and Chief Executive Officer
(former Executive Vice President, Markets at U S WEST Communications,
Inc. and founder, President and Chief Operating Officer, !NTERPRISE
Networking Services U S WEST's data networking business),
. Steve Stringer, President and Chief Operating Officer (former Global
Chief Operating Officer, GE Capital IT Solutions),
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. Scott Chandler, Chief Financial Officer (former President and CEO, C-
COR.net),
. Richard H. Johnston, Chief Sales Officer (former Executive Vice
President of Sales, GE Capital IT Solutions),
. Rand Kennedy, Senior Vice President Networks (former Principal Network
Architect, CompuServe Incorporated),
. B.P. Rick Adams Jr., Chief Marketing Officer (former Group Vice
President, Marketing, MicroAge, Inc.) and
. Michael S. Lanier, Chief Information Officer (former President of
Technology Extension Corporation, L.L.C.)
Our Business Strategy
Our goal is to become the leading national service provider of high
performance networking solutions for broadband service providers and businesses.
We intend to implement the following strategies to achieve our goal:
Complete our dense, national network build-out in our target markets and MSAs
As of December 31, 1999, we offered service in 38 markets and 67 of the
largest MSAs in the United States. When our initial network build-out is
completed, which we expect to be by the end of 2000, our services will be
offered in 70 markets and 108 MSAs, and our network will pass a total of 51
million homes and businesses, representing approximately 45% of homes and 50% of
businesses in the United States.
Network installation on this scale requires significant time and resources.
Therefore, we believe our progress to date provides us a significant time-to-
market advantage over our present and future competitors. We have gained
significant build-out experience, which we believe will streamline our further
expansion both in the United States and select international markets.
In addition to our planned footprint covering 108 of the largest MSAs, our
initial footprint in each market is dense, and covers a substantial majority of
the central offices in each market that we enter. This is important, since our
Internet service provider customers, telecommunications carrier and broadband
communication services reseller customers desire to market their services
broadly in each market. Enterprise customers also require a dense footprint in
order to provide all employees remote access to the corporate network
irrespective of where they reside. Typically, our initial footprint in each
market serves a minimum of 70% of our target market. When sufficient demand
materializes in those central offices that were not a part of our original plan,
we intend to expand our build-out to include that central office.
Maintain and build our sales and marketing relationships with leading broadband
service provider customers
We principally target Internet service providers, telecommunications
carriers and other broadband communications services resellers that can offer
their end user customers cost and performance advantages for Internet access or
private networks using our services. Our objectives in using these channels of
distribution is to increase our volume and reduce our costs by serving multiple
resellers and leveraging their selling efforts.
We currently serve the large business market through our relationships with
MCI WorldCom, AT&T and Qwest. We have fielded a direct applications and
technical support force to support our partners' solutions-based selling effort
in these large enterprises. In addition, as part of our alliance with Cisco,
Cisco has agreed to jointly market and sell our services to large businesses on
our behalf and on behalf of our telecommunications carrier customers. We believe
our investment in a direct applications and technical support force will lead to
a higher success rate for our telecommunications carrier customers, and a
preference for our services.
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We primarily serve the small and medium business market through a number of
national and regional Internet service providers, including the affiliates of
our major telecommunications carrier customers. Currently, we have distribution
relationships with many of the major national Internet service providers
including UUNET, AT&T Internet Services (AIS), Qwest Internet Services, PSINet,
Intermedia Communications and SAVVIS Communications, and a growing number of
regional Internet service providers. In the future, we intend to continue to
build the number of relationships we have with these Internet service providers.
We also market our broadband communications services to small and medium
businesses through our telemarketing and telesales division in markets where we
do not have Internet service providers reselling our services. In markets where
we have such Internet service provider relationships, we use our telemarketing
and telesales division to generate leads on behalf of our broadband service
providers.
We expect to continue to build relationships with the growing number of new
broadband communication service resellers who wish to resell our services as
part of their Internet-based or content services, such as our relationship with
iPhysicianNet.
In December 1999, we announced the availability of a consumer Internet
access service. Our consumer service is offered through Internet service
providers such as Flashcom, Telocity, DSLnetworks and Phoenix Networks. We plan
to add additional Internet service provider relationships in the future.
Expand the number of network features and applications we offer
We seek to have our network support multiple features and applications that
are enhanced and enabled by our broadband local access communications network.
Our objective is to offer multiple features and applications to our customers
that increase the value of our offering to their end users, thereby increasing
the number of subscribers on our network and the revenue we receive for each
network user. Network features and applications under development include voice-
over-DSL and frame relay over DSL.
In pursuing this objective, we intend to continue to collaborate with
leading industry broadband application service providers such as Digital
Island/Sandpiper Networks, as well as telecommunications carrier customers such
as MCI WorldCom, and leading networking equipment and software providers such as
Cisco and Microsoft to build our portfolio of network features and applications.
For example, in June 1999, MCI WorldCom and we, in conjunction with Cisco and
Jetstream Communications, successfully demonstrated multiple toll quality voice
and high-speed data communications over a single copper line utilizing DSL
technology. In addition, we are testing frame relay over DSL services with MCI
WorldCom and Intermedia Communications, and we are currently participating in
Microsoft's Windows Media Division's Broadband Jumpstart program to hold trials
of streaming media video technology.
Lead the industry in customer service and build a reputation for being a
desirable business partner
As part of our strategy to provide a high level of customer satisfaction to
obtain and retain customers and accelerate the adoption of our services, we
intend to continue to enhance our efforts to provide superior service and
customer care. Accordingly, we have developed a systematic approach to fully
integrate our operations with our broadband service provider customers'
operations to support functions such as order qualification, order entry,
customer service, installation, service assurance and billing. In addition, we
have invested and will continue to invest significant resources in process
improvement and fully automated customer support systems. Our Network Operations
Center is available to support our customers 24 hours a day, seven days a week.
For certain customers and services, we will guarantee high quality service by
providing
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carrier-class networking solutions including end-to-end proactive
network monitoring and management through our Network Operations Center, as well
as a full range of service level agreements. In addition, our network offers
multiple security features, and has been designed so that we can scale and
expand our network to meet demand.
Capitalize on new regulatory developments to advance our business
The Federal Communications Commission (FCC) mandated "line sharing" in a
November 1999 decision that became effective in mid 2000. Some details of
implementation of this mandate may be reconsidered by the FCC. Line sharing
requires existing incumbent local exchange carriers to permit competitive local
exchange carriers to add data services existing copper telephone lines to
provide services to the end-user. The Minnesota Public Utility Commission
ordered line sharing as a matter of state law in December 1999. The California
Public Utility Commission also ordered implementation of the FCC's order on line
sharing and called for a shorter implementation time frame in February 2000. In
February 2000, we successfully installed our first line sharing customer in
Minnesota.
Line sharing, where available, will allow us to provide our asymmetric DSL
service on the same existing copper telephone lines as the existing incumbent
local exchange carrier user to provide its voice service. Until the FCC's line
sharing decision, we were required in every case to provision our asymmetric DSL
services over a separate copper telephone wire from that used by the incumbent
to provide its voice services to the same customer, which required the
installation of an additional copper telephone wire to the customer's location.
Most, if not all, of the traditional telephone companies provide their own
asymmetric DSL services on the same line as existing voice services.
We believe line sharing is an extremely important opportunity for us to
enhance customer service and reduce cost. First, line sharing should
significantly reduce the time it takes incumbent local exchange carriers to make
their copper telephone wires available for our use. Second, line sharing should
significantly reduce the one time installation cost in those cases where we do
not need to send a technician to the customer site to install the service.
Third, the monthly recurring charge we pay to the incumbent local exchange
carrier for the use of the copper telephone wire should decline since the
incumbent local exchange carrier does not incur a separate monthly charge for
the use of the copper telephone line for its own DSL service.
Evaluate and selectively pursue attractive international markets
In the future, we intend to replicate our network build-out, customer
acquisition and operational knowledge in selected, attractive international
market. In January 2000, we created a 50% owned joint venture with Optel
Communications Corporation, known as Rhythms Canada. Rhythms Canada is expected
to develop a Canadian DSL network and offer dedicated high-speed DSL services to
enterprise customers and telecommunications carriers throughout Canada. We will
continue to evaluate the merits of entering other international markets, as well
as the best way for us to enter into optimal business entry structure for each
market.
Strategic Partnerships
MCI WorldCom
In March 1999, we started a strategic partnership with MCI WorldCom in
which MCI WorldCom invested $30.0 million in us.
. Providing DSL services to MCI WorldCom. We have been designated MCI
WorldCom's first choice in its alternative carrier access provisioning
system for DSL services in areas where we deploy our network for all
new DSL services, except for services to certain subsidiaries and in
locations where MCI WorldCom deploys its own DSL equipment. In
addition, MCI WorldCom has committed to sell a minimum of 100,000
business quality DSL lines, subject to penalties for
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failure to reach target commitments. MCI WorldCom will have 60 months
to place orders for these lines, starting on the date when we have
1,250 collocations in commercial service in at least 29 metropolitan
statistical areas. As part of our agreement, we must provide specified
service levels and have available capacity.
. Obtaining network services from MCI WorldCom. We have designated MCI
WorldCom as our preferred provider of network services, including
metropolitan area network services and long-haul backbone services.
MCI WorldCom has a right of first refusal to provide all of these
services to us at market competitive terms.
. Collaboration. We are jointly developing voice and data applications
over a single DSL connection. For instance, in June 1999, MCI WorldCom
and we, in conjunction with Cisco and Jetstream Communications,
successfully demonstrated toll quality voice and high-speed data
communications over a single copper line utilizing DSL technology. We
have also formed a working group with MCI WorldCom to develop and
implement the systems and procedures necessary to jointly deploy DSL
service nationwide. We will collaborate with MCI WorldCom in selecting
technologies and vendors to support our network deployments.
Microsoft
In March 1999, we entered into a strategic partnership with Microsoft, in
which Microsoft invested $30.0 million in us. We are working with Microsoft to
trial a multiple feature consumer offering in Boston including high-speed
Internet access, Internet services, Microsoft Network connectivity and streaming
media. In conjunction with this trial, we are currently participating in
Microsoft's Windows Media Division's Broadband Jumpstart program to hold trials
of streaming media video technology.
Qwest
In April 1999, we entered into a customer relationship with Qwest, in which
Qwest invested $15.0 million in us. Pursuant to this relationship, among other
things, Qwest has committed to purchase from us performance class DSL services
for sale to its customers. In return, we have agreed to use Qwest's network and
application hosting services in certain situations. The combined DSL line
commitment from Qwest and MCI WorldCom totals 200,000 lines over several years.
Cisco
In October 1998, we entered into a strategic partnership with Cisco, in
which Cisco agreed to work jointly with us to sell our services to its customers
including providing compensation to its sales representatives for selling our
services. In addition, Cisco has committed to a joint marketing program with us
to increase our market recognition among businesses and consumers. We have also
contracted with Cisco to manage and upgrade its remote access program for 8,500
teleworkers nationwide.
Our Service Offerings
We offer our customers solutions that address many of their broadband
access networking needs. Our local connection services use a variety of DSL
technologies to deliver high-speed, "always on" local access. We also aggregate
traffic within metropolitan areas and route or switch the traffic to our
broadband service provider customers, or to a corporate network within the same
metropolitan area or another metropolitan area using our inter-network
connections. In addition to local connections and metropolitan and wide area
inter-network connections, we offer a growing
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suite of network features and applications that bring additional value-added
services to our customers.
Local connection services
Our local connection services connect individual users or multiple users
on a local area network through our metropolitan network to our national
network, the Internet or a telecommunications carrier network using DSL
technology over traditional telephone lines. Our network is capable of data
transfer rates ranging from 128 kbps to 7.1 Mbps. Unlike dial-up modems and ISDN
lines, our DSL solution is "always on"; it does not require users to dial-up to
connect to the Internet or their local area network for each use.
We place DSL equipment both at the customer premises a residence or
business and in the central office that services that specific customer
premises. There are typically many incumbent carrier central offices in each
metropolitan area. We connect the DSL equipment in each central office to one of
our Metro Service Centers so that we can route or switch network traffic to
either a local destination, a national destination, or the Internet.
For our local connection services, the speed and effectiveness of the DSL
connection will vary based on a number of factors, including the distance of the
end user from the central office and the condition of the copper telephone line
that connects the end user to the central office. The specific number of
potential users who will qualify for higher speeds will vary by central office
and will be affected by line quality. In the future, we intend to examine adding
additional high-speed local access technologies to our offering as they are
developed, including emerging wireless technologies. The chart below compares
the performance and range of our local connection services as of December 31,
1999.
Speed to Speed From Range* Technology**
End User End User (feet) ------------
-------- -------- ------
144 kbps 144 kbps*** 50,000 IDSL****
256 kbps 256 kbps 18,000 SDSL****
384 kbps 384 kbps 15,000 RADSL
512 kbps 512 kbps 14,000 RADSL
768 kbps 768 kbps 12,000 RADSL
1 Mbps 1 Mbps 12,000 RADSL
1.5 Mbps 1.5 Mbps 8,000 SDSL****
3 Mbps 1 Mbps 10,700 RADSL
5 Mbps 1 Mbps 9,000 RADSL
7.1 Mbps 1.1 Mbps 7,800 RADSL
___________
* Estimated maximum distance from the central office to the end user.
** The technologies listed below are more fully described in "DSL
Technologies" below.
*** May be 128 kbps under some circumstances. **** Cannot be used with
line-sharing.
We offer three classes of broadband local access communication services,
all of which are available up to 50,000 feet from the central office which
serves the end user:
Select Links. Our Select Links offer is available in the following range of
speeds: 128 kbps x 128 kbps, 256 kbps x 256 kbps, 384 kbps x 384 kbps, 512 kbps
x 512 kbps, 768 kbps x 768 kbps, 1
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Mbps x 1 Mbps and 1.5 Mbps x 1.5 Mbps. We plan to make this service available
soon in a range of additional speeds, including 3 Mbps x 1 Mbps, 5 Mbps x 1 Mbps
and 7.1 Mbps x 1.1 Mbps.
Our Select Links services are sold through Internet service providers,
telecommunications carrier customers and broadband communication services
resellers, and are primarily used by small and medium businesses for high-speed
Internet access.
Basic installation for our Select Links offering includes our standard
inside wiring service, installation and basic configuration of the fully
featured DSL router and service activation. Installation charges consist of a
one-time charge and may be discounted for large volume commitments, long term
end user contracts, and promotions.
Complete Links. Our Complete Links service offers a fully managed Internet
Protocol (IP) over DSL service, which is available in all of our symmetric and
asymmetric speeds. Our Complete Links services are sold though Internet service
providers, broadband communications services resellers, and our internal sales
and marketing division, called the Channel Development Organization, in those
markets which are not otherwise served by our Internet service provider
customers. Our Complete Links services are primarily used by small and medium
businesses for high-speed Internet access, and enterprises for telework and
branch office connectivity.
We offer a premium installation for our Complete Links offering that
includes our standard inside wiring service, installation and basic
configuration of the fully featured DSL router or modem, end-to-end service
activation and management, maintenance and support of the DSL router or modem.
Installation charges consist of a one-time charge and may be discounted for
large volume commitments and/or long term end user contracts and promotions.
Consumer Links. Our Consumer Links services are available at the following
speeds: 144 kbps x 144 kbps, 208 kbps x 208 kbps, 384 kbps x 272 kbps, 408 kbps
x 384 kbps, 768 kbps x 408 kbps, 1. Mbps x 408 kbps, 3 Mbps x 1 Mbps and 7.1
Mbps x 1.1 Mbps. Our Consumer Links services are sold though Internet service
providers and broadband communications services resellers, and are primarily
used for Internet access.
Basic installation for our Consumer Links offering includes our standard
inside wiring service, installation and configuration of a basic DSL modem, and
service activation. We also offer our premium installation option.
Prices for our broadband local access services vary depending upon the
performance level of the service. For example, a 144 kbps service is our lowest
priced service and our 7.1 Mbps is our highest priced service.
Metropolitan area and wide area inter-network connection services
For our broadband service provider and business customers, we offer two
high-speed connection services both within and among metropolitan areas.
Metropolitan LAN. Our metropolitan area inter-network connection service
allows us to aggregate traffic from each of the central offices within a
metropolitan area to an Internet service provider, telecommunications services
carrier, broadband communications services reseller or an enterprise customer
site within that same metropolitan area. We offer our Metropolitan LAN services
in two speeds. Our 1.544 Mbps service (DS-1) is suitable for small broadband
service providers and business customers, and is available in both asynchronous
transfer mode and Internet protocols. Our 45 Mbps service (DS-3) is intended for
large broadband service providers, and business customers, and is available in
two protocols-asynchronous transfer mode and Internet protocol. In addition to
monthly service charges, we impose nonrecurring order setup charges for inter-
network connection services.
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U.S. LAN. Our wide area inter-network connection service currently operates
between each of the metropolitan areas in which we provide service, and allows
our Internet service provider customers the ability to quickly and cost-
effectively offer services in new markets, and our enterprise customers the
ability to connect affiliate offices and teleworkers nationwide. Our monthly
service charge varies depending on the number of local access connections and
the data transfer rate required by the customer.
Network features and applications
We intend to continue to add further network features and applications to
add additional value to our offering. We believe our strategy to provide
additional network features and applications will increase our revenue by
expanding the size of our addressable market, increasing the speeds required by
our customers and allowing us to receive additional recurring monthly revenue
from certain of our customers.
The features and applications that our network currently offers or
enables are listed below:
. Internet Services. We bundle high-speed DSL-based local access with
Internet access services for small and medium business customers in
markets that are not otherwise served by our broadband service
provider customers. Our basic Internet services include Internet
access using our Complete Links services, e-mail accounts and IP
addresses. Optional features include domain name transfer and
registration, Web hosting services, collocation services and virtual
private network over DSL capability. These services are provided in
cooperation with Epoch Internet.
. Service Selection. We have implemented a service selection feature
within our network that enables end users to access multiple
destinations, including the corporate local area network, the
corporate telephone system, the Internet, customers, suppliers and
partners, using the same DSL access line. This feature alleviates the
corporate network from servicing Internet traffic to a teleworker.
. Dynamic Host Configuration Protocol Functionality. This feature
relieves network administrators from the burden of notifying each
teleworker of network configuration changes. The use of this protocol
ensures that once teleworkers start up their computers, the customer's
server automatically downloads all of his or her network configuration
parameters.
. Collocation Services. We have announced plans to offer certain
broadband application service providers the ability to collocate their
equipment in our network. Collocation allows these providers to take
advantage of our distributed, fully routed IP network by placing their
caching and hosting equipment in our markets in order to seamlessly
and cost-effectively extend their network optimization services to
their customers' end users using our broadband communications access
services.
. Virtual Private Network (VPN) over DSL. This service uses the public
Internet backbone or our private data networks in conjunction with our
high-speed DSL access connections, to create a channel for sharing
information and applications within a closed user group in different
locations. Our private VPN service is available for remote or branch
offices that require high-speed interoffice connectivity across
multiple locations and for teleworkers and other remote users who want
secure access to their corporate network and the Internet from home.
. Voice over IP. Utilizing the IP over DSL capability of our network, we
enable or support our customers' implementation of voice over DSL
services through the addition of customer premises equipment and
software. This feature allows our business customers to extend the
functionality of the corporate telephone system directly into a
teleworker's home. Benefits to our business customers include
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increased worker productivity, reduced second line expenses for voice
service and the ability to aggregate and control long distance
charges.
. Streaming. Our network supports streaming media services. For certain
customers and services, we provide guaranteed data transfer rates
through service level agreements. For example, we are working with
iBEAM Broadcasting Corporation to provide a business-class video
streaming service. In addition, we are currently participating in
Microsoft's Windows Media Division's Broadband Jumpstart program to
hold trials of streaming media video technology for consumers.
In the future, we plan to continue to expand our network features and
applications by working closely with leading broadband applications service
providers, networking equipment companies, and our telecommunications carrier
customers. Future development efforts include frame relay-over-DSL.
Our expected development of voice-over-DSL will allow our broadband service
provider customers to provide a full range of local and long distance voice
services in addition to high-speed Internet and private networking services to
their end user customers over a single DSL connection. We are currently
conducting trials for a voice-over-DSL service with MCI WorldCom and Intermedia.
If we develop frame relay-over-DSL, it would allow our telecommunications
carrier customers to replace expensive, low-speed, local access frame relay
connections currently purchased from the incumbent local exchange carrier with
affordable, high-speed DSL connections that utilize the frame relay protocol. We
are currently conducting frame relay-over-DSL trials with MCI WorldCom and other
telecommunications carriers.
Customers, sales and marketing
We offer our services to broadband service providers and businesses not
otherwise served by our broadband service providers. As of December 31, 1999, we
were providing services to approximately 1,500 broadband service providers and
business customers, and had approximately 12,500 DSL lines in service. The
following is a list of selected Internet service provider, telecommunications
carrier and enterprise customers:
Select Internet Service Provider Select Telecommunications Select Enterprise
Customers Carriers Customers
UUNET MCI WorldCom Cisco
Microsoft Network AT&T Ford Motor Company
PSINet Qwest QUALCOMM
Digex Level 3 Communications SGI
SAVVIS Williams Communications
CAIS Internet Intermedia Communications
Flashcom
Telocity
Phoenix Networks
DSLnetworks
Internet service providers
Our business-focused Internet service provider customers resell our
services, typically to small and medium businesses, and our consumer-focused
Internet service providers, including Telocity, Flashcom and Microsoft Network,
resell our services to consumers. We offer our
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business-focused Internet service providers our Select Links services or our
Complete Links services, and our consumer-focused Internet service providers our
Consumer Links services. We also offer our Internet service provider customers
our metropolitan area and wide area inter-network connection services. Our
Internet service provider customers can then combine our services with their own
services to offer a total solution to their customers.
Telecommunications carrier customers
A key element of our strategy is to enter into relationships with leading
telecommunications carriers, including interexchange carriers and competitive
telecommunications carriers in order that they may resell our services to their
customers. For example, we have entered into commercial agreements with each of
MCI WorldCom, AT&T, Qwest, Level 3 Communications, Williams Communications and
Intermedia providing for the resale of our services, primarily to their carrier,
Internet service provider, broadband communication services resellers,
enterprise and small business customers.
In order to advance our telecommunications carrier customers' sales
effort to enterprises, and develop preference for the Rhythms solution, we have
fielded a carrier applications and technical support force to support our
customers' solutions-based selling efforts. We reinforce our applications and
technical support force through our alliance with Cisco. Cisco has agreed to
assist us and certain of our telecommunications carrier customers in marketing
and selling our broadband local access communications services.
We supplement our carrier applications and technical support efforts by
offering sales support services that may include training, joint proposal
development, lead generation, joint participation in national and regional
customer events and seminars, and press announcements. Additionally, we support
our carrier customers' efforts through dedicated support teams and complete
operations integration including qualifying potential end users for our service,
ordering connections, installing equipment on the customer premises, turning up
the service, monitoring the network and invoicing our carrier customer on a
single bill.
Broadband communications services resellers
An emerging component of our strategy is to enter into relationships with
broadband communications services resellers that include firms with existing
Web-based customer relationships that wish to resell broadband applications and
access services to their customers. It also includes a number of emerging
integrators of broadband communications infrastructure and applications services
to serve a specialized or vertical market need. For example, in January 2000 we
entered into a relationship with iPhysicianNet to provide its physician
customers with Web-based multimedia and fully IP internetworked broadband local
access services. We believe that this channel will enable us to penetrate our
target markets more rapidly.
Channel development organization
In markets where we do not have established indirect channels, we market
our services directly to business customers through our Channel Development
Organization. Our Channel Development Organization seeks to sell Internet
access, telework and remote branch connectivity solutions to small and medium
sized businesses, through direct marketing and consultative selling over the
phone. As of December 31, 1999, we had roughly 150 persons dedicated to this
effort. Our contracts are typically one to two years in length, and we receive
an average revenue per line per month that is higher than what we receive
through our broadband service provider channels. Once we have established
indirect channels in a market, our Channel Development Organization will provide
direct marketing, lead generation and telesales support services for our
customers.
Customer support
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We supplement certain of our Internet service providers' and broadband
communication services resellers' sales efforts by offering sales tools and
marketing programs that may include market development funds, promotions and
incentives, launch programs, sales collateral, joint participation in national
and regional customer events and training. Through our Channel Development
Organization, we will also provide direct marketing, lead generation and
telesales support services.
We support our customers through sales and marketing personnel dedicated to
each type of channel and to each of our largest broadband service provider
customers. Additionally, we support our broadband service provider customers
through complete operational integration including qualifying potential end
users for service, ordering connections, installing equipment on the customer
premises, turning up the service, monitoring the network and invoicing the
customer on a single bill.
Our agreements with our broadband service providers vary widely. Generally,
our agreements have a one to three year term, and are based on negotiated prices
that decline with increasing levels of volume achievement. Certain of our
broadband service provider customers have committed to sell specified quantities
of DSL lines, subject to penalties for failure to reach these target
commitments. In many cases, our broadband service providers have selected one or
two, and perhaps as many as three, DSL service providers as suppliers in each
market.
Our goal is to be selected as the preferred supplier or one of the
preferred suppliers by broadband service providers in each metropolitan area
where we operate. When we are selected as a preferred supplier within a given
market, we may enter into nonstandard joint marketing arrangements to promote
our DSL services. We may also offer additional price discounts in return for our
selection as a preferred supplier with first right of refusal on orders. See
"Risk Factors - We depend on third parties for the marketing and sales of our
network services."
Brand campaign
In December 1999 we launched a two-phase national brand development
campaign, including television, print, radio and online advertisements. The
first phase consists of television and national print advertising, and is
intended to build awareness for our brand and educate the market about our
broadband service offering and differentiate our services. The second phase,
which focuses on product messaging, will run in local newspapers and drive-time
radio in 30 major metropolitan markets, and is designed to generate demand for
our broadband services.
Customer Service, Operations and Support Systems
We offer our broadband service provider and business customers a one-stop
broadband service solution including network implementation, customer service,
technical support and ongoing network monitoring and billing. For major
broadband service providers and businesses, we establish dedicated teams to work
with the account to develop and implement a complete, fully automated operations
integration plan in order to ensure that our service implementation, maintenance
and billing proceeds smoothly.
Network implementation
Working with a broadband service provider or business customer we connect
our customer's premises and their end users to our network by ordering telephone
lines from the incumbent local exchange carrier or a competitive
telecommunications company, connecting our customer's premises and end users to
our network, testing the connections, configuring our customers' end users'
endpoints, connecting to our customers' routers or switches and monitoring the
connections from our Network Operations Center.
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We are implementing fully automated, Web-based, service qualification and
order entry tools using standard industry interfaces. For large customers, we
develop and implement a personalized, fully automated, private extranet site for
service qualification and order entry. Orders can be placed individually, in
real time through our Web site, or in bulk through our customers' private
extranet sites.
We are installing systems to ensure that our customers' orders
automatically flow through to the incumbent local exchange carriers' order entry
systems. In October 1999, we announced our selection of NightFire
SupplierExpress from NightFire Software to automate our process for pre-
ordering, ordering and provisioning unbundled local loops from the incumbent
local exchange carrier.
We outsource field service personnel and, to a more limited extent, use our
own field service personnel to perform any necessary inside wiring, install and
configure the endpoint and, if required, install a network interface card and
configure the end user's PC or laptop. Currently, we offer two types of
installation service. Our basic installation service includes a standard inside
wiring service, endpoint installation and configuration, and line test. Our
premium installation service also includes installing one network interface card
in the end user's computer, configuring one computer and a complete end-to-end
service test.
Customer service, technical support, and network monitoring
Our Network Operations Center in Denver provides network surveillance
through standard Simple Network Management Protocol tools for all equipment in
our network. Because we have complete end-to-end visibility of our network, we
are able to proactively detect and correct the majority of our customers'
maintenance problems remotely for certain customers and services. Our goal is to
proactively detect and repair 90% of our customer's maintenance problems before
our customers become aware of a problem.
Customer-initiated maintenance and repair requests are managed and resolved
primarily through our customer advocacy team in our Network Operations Center.
We provide support to our customers 24 hours a day, seven days a week. Our
broadband service provider and business customers typically serve as the initial
contact for service and technical support while we provide the second level of
support.
We utilize a trouble ticket management system to communicate customer
maintenance problems from the customer advocacy team to our Network Operations
Center engineers and the field service engineers. Because our Network Operations
Center is fully staffed 24 hours a day, seven days a week, we believe our
ability to provide superior proactive maintenance is significantly enhanced.
Billing
Customer bills are currently issued on a monthly basis through an internal
billing system. In the future, we expect our billing system to electronically
interface with our customers and support a broad array of billing options. Our
Customer Service Center manages customer billing inquiries. In the future,
billing inquiries will also be supported through our Web-based interfaces. In
November 1999 we announced our intention to utilize Portal Software's Infranet
customer management and billing software.
Operational Support Systems
We are implementing what we believe to be industry leading operational
support systems for DSL broadband access services. We are installing complete
flow through order management
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and provisioning systems with system-to-system interfaces. These systems will
allow us to scale our business rapidly because they will eliminate many manual
processes such as order taking and verification, line ordering, receipt and
testing, network path configuration, equipment configuration and billing.
Our system architecture is designed to enable rapid order fulfillment and
reduce the cost of customer support. We use a set of standard, off-the-shelf
systems to support our business processes. All business functions, including
sales, ordering, provisioning, maintenance and repair, billing, accounting and
decision support use a single database management system from Oracle. Complete
systems integration is accomplished through the use of Vitria middleware to
ensure rapid scaling of all business functions and uninterrupted growth.
Network Architecture
The network design features that we believe are important to our customers
are:
Carrier-class network management
Our network is designed to be carrier-class throughout. For example, it has
been designed with redundant network electronics and transmission paths. We have
the ability to electronically view our entire network including the DSL modem
located at the end user's premise from our Network Operations Center in Denver.
Because we proactively monitor and manage the network at all times for certain
customers and services, we can identify and address network problems quickly. In
addition, for those customers that choose our Internet Protocol-over-DSL
capability, we are able to monitor and manage Internet Protocol applications all
the way to the end user location.
Scaleable network performance
We anticipate significant volume on our network over time. Accordingly, we
have designed our network for scalability and consistently high performance as
network usage grows. Our local access network is designed so that each line in
service is a dedicated connection, and as such, does not contend for bandwidth
or capacity with other users as they are added to the network. Our metropolitan
and wide area inter-networking services have been designed to support a wide
array of service level agreements that guarantee specific levels of network
performance to our broadband service provider and business customers.
We believe that our network is unique in that we support Internet Protocol
routing as well as Asynchronous Transfer Mode switching equipment in our
network. IP networks allow our customers' end users to easily access thousands
of Internet or private network destinations without the need to establish
physical permanent virtual connections for each destination, creating a much
less complex, cost-effective, easily scalable network for our customers and
their end users.
Our network support systems are also scaleable. We use industry standard,
off-the-shelf software to support network provisioning, installation, testing,
monitoring and trouble management. We have implemented and are continually
enhancing these systems using Web-based, distributed client-server systems
architecture. This approach will allow us to grow our customer support and
network management capabilities as customer demand increases.
Network security
Non-dedicated access, such as dial-up modem or ISDN lines, or dedicated
access to the public Internet, represents security risks for business networks.
These security risks are mitigated through the use of virtual private network
technologies such as authentication, tunneling, encryption and through the use
of permanent virtual circuits that define a logical dedicated connection between
the end user and the corporate network. Our network enables businesses to fully
employ these
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virtual private network technologies by using their own equipment at the edges
of our network, or optionally purchasing virtual private networking services
from us. For our IP-over-DSL network implementation, we have added several
layers of security for our customers including Multi-Protocol Label Switching
(MPLS), policy routing, network segmentation by customer and the implementation
of access control at the end user's DSL router.
Multiple network features and applications capability
Our network has been designed from the outset to be flexible and
upgradeable to support new network features and applications. Because our
network utilizes multiple technology platforms, we can provide higher end user
speeds than other national providers, a broad range of IP internetworking
capabilities in addition to traditional virtual point-to-point connectivity, and
various types of network traffic starting with data, but expanding to voice and
video as well. Our use of multiple technology platforms, also allows us to
leverage the research and development capabilities of several different
equipment manufacturers to provide a growing number of network features and
applications in our offering.
Because the quality and characteristics of each end user's telephone wire
is different, we are able to select a technology solution that provides the
highest speed available for each end user. As of December 31, 1999, users on our
network were capable of receiving average data transfer rates of 1.9 Mbps.
Our network supports traditional transmission protocols such as
Asynchronous Transfer Mode and Frame Relay, as well as the rapidly growing IP
transmission protocol. Our IP-over-DSL network capability allows us to provide a
broad range of IP internetworking capabilities in a simpler, more cost-effective
manner than by using more traditional protocols. For example, our network can
give each user simultaneous access to the Internet and private networks using a
single connection, the ability to take advantage of distributed content caching
services in an internetworked environment and the ability to add other emerging
IP services such as voice over IP using their existing connection.
Our network has also been designed to support multiple types of network
traffic, starting with data but expanding to voice applications, such as voice
over DSL and video applications such as conferencing and streaming. Our network
is also easily upgradeable in that it has been designed to incorporate new
applications and features with customer premises equipment and software alone,
avoiding costly, time consuming network upgrades.
Our network is an overlay network; we place our network electronics on an
already existing physical network that we lease from existing transport services
providers local access telephone wires from incumbent local exchange carriers,
metropolitan fiber from incumbent local exchange carriers or competitive
telecommunications carriers and long-distance backbone fiber from long distance
(interexchange) carriers. The primary components of our network are customer
endpoint devices, local transport, our connection points, high-speed
metropolitan area network, our Metro Service Centers, our backbone and our
Network Operations Center.
Customer endpoint devices
Depending upon the wishes of our broadband service provider customer, we
will either include the end user endpoint device the DSL modem or router as part
of our complete service offering, or buy our DSL endpoints from our suppliers
for resale to our service provider for use by their end users. For our business
customers, we always include the end user endpoint device as part of our
complete service offering. We configure and install these modems on the end
user's premises along with any basic on-site wiring needed to connect the modem
to the copper telephone line leased from the incumbent carrier. Although we
generally deploy central office based DSL multiplexing equipment from multiple
vendors in each of our central offices, currently, almost all of the DSL modems
and central office-based DSL multiplexing equipment we use for a single
connection over a copper telephone line must
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come from the same vendor since there are no existing interoperability standards
for the equipment used in our higher speed services.
Local transport
Our local transport connects customer endpoint devices to our network
using a DSL-capable copper telephone wire leased by us from the incumbent local
exchange carrier under terms specified in our interconnection agreements and/or
the terms and conditions set by the state public utility commissions. In some
cases, DSL-capable lines result from removing certain devices from voice grade
lines to allow the lines to carry digital signals; at times involving an
additional one-time or monthly charge relative to voice grade lines. For private
line access, the transport is leased copper or fiber trunks provided by the
incumbent local exchange carrier or a competitive telecommunications carrier.
Connection points
Through our interconnection agreements with the incumbent local exchange
carriers, we secure collocation space in central offices serving the area where
we intend to offer our services. In each of these connection points, we connect
our end users' DSL endpoint equipped copper telephone lines to our DSL
multiplexing equipment (DSLAMs) to provide high-speed DSL signals to them. Each
of our connection points is designed to offer the same high reliability and
availability standards as the incumbent carrier's own central office equipment.
We expect to place our equipment in certain of the central offices in any
metropolitan area that we enter. As of December 31, 1999, we had connection
points in over 1,200 central offices. Although we expect that many connection
points will be physically located within the central office, we have placed and
will continue to place our connection points in locations immediately adjacent
to central offices, when collocation space within the central office is not
available.
High-Speed Metropolitan Area Network
In each of our targeted metropolitan area markets, we operate a private
metropolitan area network. The network consists of high-speed Asynchronous
Transfer Mode communications circuits that we lease from competitive carriers or
incumbent local exchange carriers to connect our connection points to the Metro
Service Center. The metropolitan area network operates at 45 Mbps (DS-3) today,
and can be upgraded to 155 Mbps (OC-3) and 622 Mbps (OC-12) in the future. We
lease a substantial portion of this capacity from MCI WorldCom, as described in
"Strategic Partnerships."
Metro Service Centers
The Metro Service Center is a physical point of presence within a
metropolitan area where local access traffic is aggregated from the connection
points over our high-speed metropolitan area network. Although we generally
expect to have one Metro Service Center in each of our targeted metropolitan
areas, in larger metropolitan areas, we may have two. The Metro Service Center
houses our Asynchronous Transfer Mode switches and Internet Protocol routers. We
design our Metro Service Centers for high availability including battery backup
power, redundant equipment and active network monitoring.
Backbone
Our backbone interconnects our Metro Service Centers so that communications
traffic can be transported among different metropolitan areas. We currently
lease frame relay backbone and Asynchronous Transfer Mode backbone capacity from
a number of long distance carriers. We have almost completed upgrading our
nationwide network to two protocols Asynchronous Transfer Mode and Internet
Protocol.
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Network Operations Center
Our entire network is managed from the Network Operations Center located in
Denver. From this center, we provide end-to-end network monitoring and
management, 24 hours a day, seven days a week, using advanced network management
tools. This enhances our ability to address performance or connection issues
before they affect our end user's experience. From the Network Operations
Center, we monitor the equipment and circuits in each Metro Service Center, each
metropolitan area network, each connection point, and each of the individual end
user lines and endpoints. A second Network Operations Center is under
construction. Please see "Risk Factors - system failure or breach of network
security could cause delays or interruptions of service to our customers."
We are pursuing a program of ongoing network development. Our engineering
efforts focus on the design and development of new technologies and services to
increase the speed, efficiency, reliability and security of our network and to
enable network features and applications developed by us or by third parties.
Please see "Risk Factors - We may be unable to effectively expand our network
services and provide high performance to a substantial number of end users."
DSL Technologies
We utilize various DSL equipment and technologies from different vendors.
The various DSL technologies allow us to offer a range of connection speeds and
value-added network features and applications. Actual speeds that can be
provided over a particular line are a function of the distance from the end user
or local area network to the central office and the quality of the copper
telephone line. The basic features and the market positioning of our primary DSL
technologies include:
Rate adaptive digital subscriber line (RADSL)
RADSL technology allows each end user or local area network to utilize the
full digital capability of the underlying telephone line. Speeds reach up to 7.1
Mbps downstream and up to 1.1 Mbps upstream if the end user or local area
network is within 7,800 feet from the central office. We use this technology for
end users or local area networks needing very high access speeds. Our target
customers for RADSL connections consist of small and medium businesses and
branch offices of large businesses needing T-1 (1.5 Mbps) or higher speeds. We
believe that these businesses often find the cost of dedicated private line or
frame relay services to be prohibitive. Our RADSL connection competes favorably
on a price and performance basis relative to traditional fractional T-1 and
frame relay services.
Our RADSL service also provides the highest speed of any of our DSL
services for bandwidth intensive applications, and is necessary to support line
sharing, which we believe will offer us significant customer service and cost
advantages when implemented.
Symmetric digital subscriber line (SDSL)
Our SDSL technology allows end users and local area network to achieve up
to 1.5 Mbps speeds both downstream and upstream. Depending on the quality of the
copper telephone line, 1.5 Mbps can typically be achieved if the end user or
local area network is within 8,000 feet, or approximately 1.5 miles, from the
central office.
Integrated digital subscriber line (IDSL)
IDSL technology allows us to reach all end users or local area networks
within a central office serving area within 50,000 feet of the end user or local
area network distance from the central office. Our IDSL service operates at up
to 144 kbps in each direction. This service can use existing integrated services
digital network (ISDN) equipment at the end user site, and is targeted at the
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integrated services digital network (ISDN) replacement market. For information
intensive users, we believe that IDSL compares favorably with integrated
services digital network (ISDN) on a price/performance basis when the monthly
flat rate IDSL charge is compared with the per minute integrated services
digital network (ISDN) charge and because IDSL, as an "always on" service is not
subject to the inconvenience of ISDN's dial-up characteristics. We also offer
IDSL to end users that have lines that do not consist of continuous copper, such
as digital line carrier equipped lines that are partially copper and partially
fiber.
Competition
The markets for broadband service provider and business broadband access
services are extremely intense. We face competition from many competitors with
significantly greater financial resources, well-established brand names and
large, existing installed customer bases. Moreover, we expect the level of
competition to intensify in the future. We expect significant competition from:
Incumbent Local Exchange Carriers. All of the largest incumbent local exchange
carriers in our target markets have begun offering DSL services or have
announced their intention to provide DSL services in the near term. As a result,
the incumbent local exchange carriers represent strong competition in all of our
markets, and we expect this competition to intensify. The incumbent local
exchange carriers have well-established brand names and reputations, for high
quality service in their regions, possess sufficient capital to deploy a DSL
network rapidly and own the central offices and copper telephone wires.
Importantly, they can offer both digital data services and their existing voice
services over a single line to achieve a lower cost per line per month than we
can until line sharing is widely implemented. Certain of the incumbent local
exchange carriers have priced their consumer DSL services as low as $19-$29 per
line per month, placing very high pricing pressure on our Consumer Links
services.
Traditional Interexchange Carriers. Many of the leading traditional
interexchange carriers, such as AT&T, MCI WorldCom and Sprint, are rapidly
expanding their networks to include high-speed, local access services, and/or
acquiring other companies with high-speed local access capabilities, including
cable modem (such as AT&T's acquisition of TCI and its pending acquisition of
MediaOne, both of which can offer cable modem service). They also have
interconnection agreements with the incumbent local exchange carriers and may
have secured collocation spaces from which they may have begun to offer
competitive DSL services. When combined with their extensive, existing
metropolitan and wide area networks, and full range of Internet and private
networking services, they are able to provide their customers with a complete
broadband communications offer capable of voice, data and video solutions.
Because these competitors have significantly greater financial resources, enjoy
strong brand recognition, and have large, existing business and consumer
franchises, they represent significant competition.
Newer Interexchange Carriers. The newer interexchange carriers, such as
Williams Communications, Qwest and Level 3 Communications, are building and
managing high bandwidth, packet-based metropolitan and wide area networks
nationwide. Additionally, they are constructing large hosting centers in major
metropolitan areas and partnering with broadband applications services providers
to provide a full range of broadband communications services to their Internet
service providers, telecommunications carriers, broadband communications
services resellers, and in some cases their business and consumer customers.
Some carriers also have interconnection agreements with the incumbent local
exchange carriers and have secured collocation spaces from which they could
begin to offer competitive DSL services. Because they could extend their
existing fiber networks to include high-speed, local access services using DSL,
either alone, or in partnership with others, they represent a significant
competitive threat.
Cable Modem Service Providers. Cable modem service providers, like Excite@Home,
AT&T (through its acquisition of TCI and pending acquisitions of MediaOne) and
AOL, and their cable partners, are offering high-speed Internet access over
hybrid fiber coaxial cable networks to consumers, and increasingly, businesses.
Similar networks are being deployed in some areas by the electric power company,
by itself or in partnership with other service providers. Where deployed,
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these networks provide Internet access services similar to our services, and in
some cases at higher speeds. In certain cases cable modem services are priced
lower than our services, partly because operators share the bandwidth available
on their cable networks among multiple end users.
Wireless and Satellite Data Service Providers. Wireless and satellite data
service providers are developing wireless and satellite-based Internet and
private network connectivity. We may face competition from terrestrial wireless
services, including two Gigahertz (Ghz) and 28 Ghz wireless cable systems
(Multi-channel Multipoint Distribution System (MMDS) and Local Multipoint
Distribution System (LMDS)), and 18 Ghz and 39 Ghz point-to-point microwave
systems. For example, the FCC has recently revised its rules to permit ITFS and
MMDS licensees to use their systems to offer two-way services, including high-
speed data, rather than solely to provide one-way video services. Many ITFS and
MMDS providers are teaming with wireless data technology companies, or on their
own planning to offer wireless data services. The FCC also recently auctioned
spectrum for LMDS services in all markets, and later this year will auction
spectrum in the 700 MHz range, currently being used for television channels 60-
69. This spectrum is expected to be used for wireless cable and telephony
services, including high-speed digital services, to both businesses and
individual consumers. In addition, companies such as Teligent, Advanced Radio
Telecom and WinStar Communications hold point-to-point microwave licenses to
provide fixed wireless services such as voice, data and video conferencing.
We also may face increasing competition from satellite-based systems.
Motorola Satellite Systems, Inc., Hughes Space Communications (a subsidiary of
General Motors Corporation), Teledesic LLC, and others have filed applications
with the FCC for global satellite networks which can be used to provide
broadband voice and data services, and in some cases have begun providing such
services. The FCC has authorized several of these applicants to operate their
proposed networks, and some are providing commercial service.
Internet Service Providers. Internet service providers provide Internet access
to residential and business customers. These companies generally provide such
Internet access, on a dial-up basis, over the incumbent carriers' circuit
switched networks at integrated services digital network (ISDN) speeds (either
64 kbps or 128 kbps) or below. However, some Internet service providers have
begun offering DSL-based access using their own DSL services such as HarvardNet
and InterAccess, or DSL services offered by the incumbent local exchange carrier
or other DSL-based competitive local exchange carriers. Because certain large,
national Internet service providers, such as Verio and Concentric, have made
investments in our competitors, and entered into joint marketing arrangements
nationwide, it is difficult for us to recruit these Internet service partners as
customers, and as a result, they represent important competitors.
Online Service Providers. Online service providers include companies such as
AOL, and the Microsoft Network (MSN) that provide, over the Internet and on
proprietary online services and networks, content and applications ranging from
news and sports to consumer video conferencing. These services are designed for
broad consumer access over telecommunications-based transmission media, which
enable the provision of digital services to the significant number of consumers
who have personal computers with modems. In addition, they provide Internet
connectivity, ease-of-use and consistency of environment. Many of these online
service providers have developed their own access networks for modem
connections. If these online service providers were to extend their access
networks to include DSL or other high-speed service technologies, they would
become competitors of ours.
Competitive Local Exchange Carriers. Certain competitive carriers, including
Covad Communications Group and NorthPoint Communications, offer DSL-based
broadband access services using a business strategy similar to ours. In
addition, regional competitive carriers, including HarvardNet, Network Access
Solutions Corp., Blue Star, and DSL.net, offer DSL-based access services that
compete with the services we offer. Other voice competitive local exchange
carriers, such as NEXTLINK Communications, Allegiance Communications and MGC
Communications, have also announced that they have or will deploy DSL-based.
Conditions attached to the merger
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between SBC and Ameritech may make entry and operation in affected regions
easier for our competitors. The 1996 Telecommunications Act specifically grants
competitive carriers the right to negotiate interconnection agreements with
incumbent carriers, including interconnection agreements that may be identical
in all respects to our agreements.
Many of these competitors are offering, or may soon offer, technologies and
services that will directly compete with some or all of our service offerings.
Such technologies include integrated services digital network (ISDN), DSL,
wireless and satellite data and cable modems. Please see "Risk Factors: The
market in which we operate is highly competitive, and we may not be able to
compete effectively, especially against established industry competitors with
significantly greater financial resources, for more details about this risk."
Some of the competitive factors we face include:
. transmission speed,
. reliability of service,
. breadth of service availability,
. price/performance,
. network security,
. ease of access, installation and use,
. content bundling,
. customer support,
. brand recognition,
. operating experience,
. ability to scale,
. capital availability and
. exclusive contracts.
Interconnection Agreements With Incumbent Carriers
Interconnection agreements with incumbent carriers are critical to our
business. These agreements cover a number of aspects of our relationships with
incumbent carriers, including:
. the prices we pay to lease and the access we have to the incumbent
carrier's copper lines;
. the removal by the incumbent carrier of equipment or electronics from
lines to enable these lines to transmit DSL signals;
. the price and terms for collocation of our equipment in the incumbent
carrier central offices;
. the price we pay and the access we have to the incumbent carrier's
transport facilities;
. the ability we have to access conduits and other rights-of-way the
incumbent carrier uses to construct its own network facilities;
. the operational support systems and interfaces that we can use to place
orders and report and monitor the incumbent carrier's response to our
requests;
. the dispute resolution process we use with the incumbent carrier to
resolve disagreements on the terms of the interconnection contract; and
. the term of the interconnection agreement, its transferability to
successors, its liability limits and other general aspects of our
relationship with the incumbent carrier.
We have signed interconnection agreements with seven different major
incumbent carriers covering 24 states and the District of Columbia. In many
cases, incumbent carriers do not agree to the provisions in interconnection
agreements that we request, and we have not consistently prevailed in obtaining
all of the provisions we desire. We may be unable to continue to sign
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interconnection agreements with incumbent carriers. If we are unable to enter
into, or experience delay in obtaining, interconnection agreements, this
inability or delay may materially and adversely affect our business and
financial prospects. The Telecommunications Act also requires the incumbent
carriers to permit competitive carriers to adopt previously signed
interconnection agreements, in whole or in part, in some circumstances.
Our interconnection agreements have a maximum term of three years,
requiring us to renegotiate the existing terms in the future. We may be unable
to extend our existing interconnection agreements or renegotiate new agreements
on favorable or any terms. In addition, our interconnection agreements are
subject to state commission, Federal Communications Commission and judicial
oversight. These bodies may modify the terms or prices of our interconnection
agreements in ways that would adversely affect our business and financial
prospects.
Government Regulation
A significant portion of the services that we offer, particularly through
our wholly owned subsidiaries, Rhythms Links Inc., formerly ACI Corp., and
Rhythms Links Inc.-Virginia, formerly ACI Corp.-Virginia, may be subject to
regulation at the federal, state and/or local levels. Future federal or state
regulations and legislation may be less favorable to us than current regulation
and legislation and therefore have a material and adverse impact on our business
and financial prospects. In addition, we may expend significant financial and
managerial resources to participate in proceedings setting rules at either the
federal or state level, without achieving a favorable result.
Federal legislation and regulation
The 1996 Telecommunications Act, enacted on February 8, 1996, substantially
departs from prior legislation in the telecommunications industry by
establishing local exchange competition as a national policy. This act removes
state regulatory barriers to competition and preempts laws restricting
competition in the local exchange market.
The 1996 Telecommunications Act in some sections is self-executing, but in
addition, the Federal Communications Commission issues regulations that identify
specific requirements upon which we and our competitors rely in implementing the
changes it prescribes. The outcome of these various ongoing Federal
Communications Commission rulemaking proceedings or judicial appeals of such
proceedings could materially affect our business and financial prospects.
The 1996 Telecommunications Act, and the Federal Communications
Commission's initial rules interpreting such act, encourage increased local
competition. A federal appeals court for the Eighth Circuit reviewed some of the
initial rules, and overruled some of its provisions, including some rules on
pricing and nondiscrimination. In January, 1999, the United States Supreme Court
reversed elements of the Eighth Circuit's ruling, finding that the Federal
Communications Commission has broad authority to interpret the 1996
Telecommunications Act and issue rules for its implementation, specifically
including authority over pricing methodology. The Supreme Court upheld the
Federal Communications Commission's orders to the incumbent carriers to combine
unbundled elements for competitors, and to allow competitors to pick and choose
among provisions in existing interconnection agreements. The Supreme Court also
found that the Federal Communications Commission's interpretation of the rules
for establishing unbundled elements was not consistent with the 1996
Telecommunications Act, and required the Federal Communications Commission to
reconsider its delineation of unbundled elements. The Federal Communications
Commission's replacement decision on unbundled elements reaffirmed the right of
CLECs like Rhythms to obtain access to the necessary unbundled elements in the
incumbent network. This decision remains subject to reconsideration appeal.
In November, 1998, the Federal Communications Commission ruled that DSL
services provided as dedicated access services in connection with interstate
services such as Internet access are interstate services subject to the Federal
Communications Commission's jurisdiction. In
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November, 1999 the Federal Communications Commission, upon further
reconsideration, reiterated this decision. On March 24, 2000, the D.C. Circuit
vacated the Federal Communications Commissions order with respect to dial-up
Internet traffic, without addressing the jurisdictional nature of DSL services.
In addition, in the Spring of 1998, four of the regional Bell Operating
Companies petitioned the Federal Communications Commission, and they and others
have initiated legislative efforts since then, to be relieved of certain
regulatory requirements in connection with their own DSL services, including
obligations to unbundle DSL loops, but not the obligation to unbundle the loops
we purchase for our DSL services, and to resell DSL services. In October 1998,
the Federal Communications Commission ruled that DSL services are
telecommunications services subject to the requirements of the 1996
Telecommunications Act to unbundle such services and offer them for resale. In
October 1998, the Federal Communications Commission also issued a Notice of
Proposed Rulemaking indicating its intention to clarify expanded rights of
competitive carriers for collocation, access to copper loops, and various other
issues of consequence to competitive carriers deploying DSL services. The
Federal Communications Commission also indicated its intention to allow
incumbent carriers to create separate affiliates for their DSL businesses that
would have to operate as competitive carriers and would be permitted to operate
free of the resale and unbundling obligations of the 1996 Telecommunications
Act. The final outcome of these decisions, originally scheduled to be announced
on January 28, 1999, had been postponed by the Federal Communications Commission
while it considered the impact of the Supreme Court's ruling on the 1996
Telecommunications Act. On March 31, 1999, the Federal Communications Commission
issued a decision on collocation issues that was generally favorable to the
competitive carriers. This decision was appealed to the D.C. Circuit by U S WEST
and GTE. On March 17,2000, the D.C. Circuit vacated and remanded certain aspects
of the Commission's decision. The Commission decision on remand could impact the
terms and conditions governing our ability to collocate. In the same decision
the Federal Communications Commission established further proceedings to
consider issues related to unbundled network elements. In December of 1999, the
Federal Communications Commission determined that by June of 2000, incumbents
must allow data carriers to provide service over the same line that the
incumbent provides its own voice services otherwise known as "line sharing".
These decisions are subject to reconsideration and appeal. In addition, state
commission determination of the prices for these new elements could
significantly impact our business interest.
State regulation
Some of our services, particularly those of our subsidiaries, Rhythms Links
Inc. and Rhythms Links Inc.-Virginia, may be classified as intrastate services
subject to state regulation. All of the states where we operate, or will
operate, require some degree of state regulatory commission approval to provide
certain intrastate services. In most states, intrastate tariffs are also
required for various intrastate services, although we are not typically subject
to price or rate of return regulation for tariffed intrastate services. Actions
by state public utility commissions could cause us to incur substantial legal
and administrative expenses.
Under the 1996 Telecommunications Act, if we so request, incumbent carriers
have a statutory duty to negotiate in good faith with us for agreements for
interconnection and access to unbundled network elements. These negotiations are
conducted on a region-wide basis, and individual agreements are then signed for
each of the states in the region for which we have made a request. We have
signed interconnection agreements with SBC Communications, Bell Atlantic,
BellSouth, GTE, Pacific Bell, U S WEST and Cincinnati Bell. We have signed an
interconnection agreement with Cincinnati Bell for Ohio and Kentucky. We have
signed agreements with SBC Communications for Illinois, Michigan, Indiana, Ohio,
Wisconsin (formerly Ameritech) and California (formerly Pacific Bell). We have
signed agreements with Bell Atlantic for the District of Columbia, Maryland,
Massachusetts, New Jersey, New York, Pennsylvania, Virginia, Connecticut,
Delaware, New Hampshire and Rhode Island. We are currently negotiating an
agreement for West Virginia. We have signed agreements with BellSouth for
Alabama, Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina,
South Carolina and Tennessee. We have signed agreements with GTE for California,
Florida, North Carolina, Washington and Texas and are currently completing
agreements for Ohio, Oregon and Virginia. We have signed agreements with
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U S WEST for Arizona, Colorado, Minnesota, Oregon, Washington, Iowa, Nebraska,
New Mexico, North Dakota, Montana, and Utah. In addition, we have signed an
arbitrated agreement with SBC for Texas, and are currently negotiating for
Kansas and Missouri and with Sprint for Florida, Minnesota, Nevada, New Jersey,
North Carolina, Ohio, Pennsylvania, Tennessee and Virginia and with the Southern
New England Telephone Company for Connecticut. These interconnection agreements
may not be on terms that are entirely satisfactory to us.
During these negotiations, either the incumbent carrier or we may submit
disputes to the state regulatory commissions for mediation and, after the
expiration of the statutory negotiation period set forth in the 1996
Telecommunications Act, we may submit outstanding disputes to the states for
arbitration. We arbitrated with SBC Communications Inc. in Texas the terms of
our interconnection agreement with Southwestern Bell for Texas. On November 30,
1999 the Texas Public Utilities Commission Arbitrators issued an Award deciding
most issues in favor of Rhythms' positions, and ordered the parties to conclude
the negotiations by adopting language consistent with the Award. On February 7,
2000, the full Commission approved the interconnection agreement proposed by the
Parties implementing the Arbitrator's Award, and rejected requests by SBC for
rehearing of the Arbitrator's Award. This Order remains subject to additional
requests for rehearing or appeal.
Under the 1996 Telecommunications Act, states have begun and, in a number
of cases, completed regulatory proceedings to determine the pricing of unbundled
network elements and services, and the results of these proceedings will
determine the price we pay for, and whether it is economically attractive for us
to use, these elements and services.
We are subject to requirements in some states to obtain prior approval
for, or notify the state commission of, any transfers of control, sales of
assets, corporate reorganizations, issuances of stock or debt instruments and
related transactions. Although we believe such authorizations could be obtained,
there can be no assurance that the state commissions would grant us authority to
complete any transactions.
Local government regulation
Should we in the future decide to operate our own transport facilities over
public rights-of-way, we may be required to obtain various permits and
authorizations from municipalities in which we operate such facilities. Some
municipalities may seek to impose similar requirements on users of transmission
facilities, even though they do not own such facilities. If municipal
governments impose conditions on granting permits or other authorizations or if
they fail to act in granting such permits or other authorizations, our business
could be adversely affected.
Employees
As of December 31, 1999, we had approximately 1,250 employees. We believe
that our future success will depend in part on our continued ability to attract,
hire and retain qualified personnel. Competition for such personnel is intense,
and we may be unable to identify, attract and retain such personnel in the
future. None of our employees are represented by a labor union or are the
subject of a collective bargaining agreement. We have never experienced a work
stoppage and believe that our employee relations are good.
Risk Factors
In addition to the other information contained herein, you should carefully
consider the following risk factors in evaluating our company.
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We cannot predict our success because we have a short operating history
We formed our company in February 1997, and we have a short operating
history for you to review in evaluating our business. We have limited historical
financial and operating data upon which you can evaluate our business and
prospects. We entered into our first interconnection agreement with an incumbent
carrier in July 1997 and began to offer commercial services in our first market
in April 1998. We have limited commercial operations and have recognized limited
revenue since our inception. In addition, our senior management team and our
other employees have worked together at our company for only a short period of
time.
Because our market is new and evolving, we cannot predict its future growth or
ultimate size, and we may be unable to compete effectively
The market for broadband local access DSL communication services using
copper telephone lines is in the early stages of development. Since this market
is new and evolving and because our current and future competitors are likely to
introduce competing services, we cannot accurately predict the rate at which
this market will grow, if at all, or whether new or increased competition will
result in market saturation. Various providers of broadband local access DSL
communication services are testing products from various suppliers for various
applications. Certain critical issues concerning commercial use of DSL for
Internet and private network access, including security, reliability, ease and
cost of access and quality of service, remain unresolved and may impact the
growth of these services. If the markets for our services fail to develop, grow
more slowly than anticipated or become saturated with competitors, these events
could materially and adversely affect our business, prospects, operating results
and financial condition.
Our success will depend on the development of this new and rapidly evolving
market and our ability to compete effectively in this market. To address these
risks, we must, among other things:
. rapidly expand the geographic coverage of our network services;
. raise additional capital;
. enter into interconnection agreements and working arrangements with
additional incumbent carriers, substantially all of which we expect to be
our competitors;
. deploy an effective network infrastructure;
. attract and retain customers;
. successfully develop and maintain relationships and activities with our
broadband service providers, including MCI WorldCom, Microsoft, Qwest,
Level 3 Communications and Cisco;
. continue to attract, retain and motivate qualified personnel;
. accurately assess potential markets and effectively respond to
competitive developments;
. continue to develop and integrate our operational support system and
other back office systems;
. obtain any required governmental authorizations;
. comply with evolving governmental regulatory requirements;
. increase awareness of our services;
. rapidly scale our operations and the systems that support those
operations;
. continue to upgrade our technologies; and
. effectively manage our expanding operations.
We may not be successful in addressing these and other risks, and our
failure to address risks would materially and adversely affect our business,
prospects, operating results and financial condition.
Our substantial debt creates financial and operating risk
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We are highly leveraged, and we intend to seek additional debt funding in
the future. As of December 31, 1999, we had approximately $506.1 million of
outstanding debt. We are not generating sufficient revenue to fund our
operations or to repay our debt. Our substantial leverage poses the risks that:
. we may be unable to pay dividends on our preferred stock or to repay our debt,
due to one or more events discussed in "Risk Factors;"
. we may be unable to obtain additional financing;
. we must dedicate a substantial portion of our cash flow from operations to
servicing our debt once our debt requires us to make cash interest payments,
and any remaining cash flow may not be adequate to fund our planned
operations; and
. we may be more vulnerable during economic downturns, less able to withstand
competitive pressures and less flexible in responding to changing business and
economic conditions.
We will need significant additional funds, which we may not be able to obtain
The expansion and development of our business will require significant
additional capital. We intend to seek substantial additional financing in the
future to fund the growth of our operations, including funding the significant
capital expenditures and working capital requirements necessary for us to
provide service in our targeted markets. We believe that our current capital
resources, will be sufficient to fund our aggregate capital expenditures and
working capital requirements, including operating losses, through approximately
December 2001. Although we expect that our initial build-out will be complete by
this date, we anticipate that we will continue building our network beyond our
initial build-out plans and will need significant additional capital, whether or
not our estimate on how long current capital resources will last is accurate. In
addition, our actual funding requirements may differ materially if our
assumptions underlying this estimate turn out to be incorrect. Therefore, you
should consider our estimate in light of the following facts:
. we have no meaningful history of operations or revenues;
. our estimated funding requirements do not reflect any contingency amounts and
may increase, perhaps substantially, if we are unable to generate revenues in
the amount and within the time frame we expect or if we have unexpected cost
increases; and
. we face many challenges and risks, including those discussed elsewhere in Risk
Factors.
We may be unable to obtain any future equity or debt financing on
acceptable terms or at all. Recently the financial markets have experienced
extreme price fluctuations. A market downturn or general market uncertainty may
adversely affect our ability to secure additional financing. The indentures that
govern the 1998 senior discount notes, the 1999 senior notes and the 2000 senior
notes restrict our ability to obtain additional debt financing. Any future
borrowing instruments, such as credit facilities and lease agreements, are
likely to contain similar or more restrictive covenants and could require us to
pledge assets as security for the borrowings. If we are unable to obtain
additional capital or are required to obtain it on terms less satisfactory than
what we desire, we will need to delay deployment of our network services or take
other actions that could adversely affect our business, prospects, operating
results and financial condition. If we are unable to generate sufficient cash
flow or obtain funds necessary to meet required payments of our debt, then we
will be in default on our debt instruments. To date, our cash flow from
operations has been insufficient to cover our expenses and capital needs. For
more details about our financial condition, please see Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations-
Liquidity and Capital Resources.
We may be unable to satisfy, or may be adversely constrained by, the covenants
in our debt securities
The indentures governing our 1998 senior discount notes, our 1999 senior
notes and our 2000 senior notes impose significant restrictions on how we can
conduct our business. For example,
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the restrictions prohibit or limit our ability to make dividend payments, incur
additional debt and engage in certain business activities. The restrictions may
materially and adversely affect our ability to finance future operations or
capital needs or conduct additional business activities. Any future senior debt
that we may incur will likely impose additional restrictions on us. If we fail
to comply with any existing or future restrictions, we could default under the
terms of the applicable debt and be unable to meet our debt obligations. If we
default, the holders of the applicable debt could demand that we repay the debt,
including interest, immediately. We may be unable to make the required payments
or raise sufficient funds from alternative sources to make the payments. Even if
additional financing is available in the event that we default, it may not be on
acceptable terms.
We cannot predict our success because our business model is unproven
We have not validated our business model and strategy in the market. We
believe that the combination of our unproven business model and the highly
competitive and fast changing market in which we compete makes it impossible to
predict the extent to which our network services will achieve market acceptance
and our overall success. To be successful, we must develop and market network
services that are widely accepted at profitable prices. We may never be able to
deploy our network as planned, achieve significant market acceptance, favorable
operating results or profitability or generate sufficient cash flow to repay our
debt. Of the approximately 12,500 lines that are in service, we installed
approximately 60% to only five customers, with approximately 40% of these total
lines to Cisco. None of our large business customers, with the exception of
Cisco, has rolled out our services broadly to its employees and none of our
broadband service provider customers have rolled out our services broadly to
their end-users, and we cannot be certain when or if these rollouts will occur.
We will not receive significant revenue from our large customers unless these
rollouts occur. Any continued or ongoing failure for any reason of large
customers to roll out our services, failure to validate our business model in
the market, including failure to build-out our network, achieve widespread
market acceptance or sustain desired pricing would materially and adversely
affect our business, prospects, operating results and financial condition.
We expect our losses to continue
We have incurred losses and experienced negative operating cash flow for
each month since our formation. As of December 31, 1999, we had an accumulated
deficit of approximately $257.6 million. We intend to rapidly and substantially
increase our expenditures and operating expenses in an effort to expand our
network services. We expect to have annual interest and amortization expense
relating to our 1998 senior discount notes, our 1999 senior notes and our 2000
senior notes of approximately $89.0 million in 2000 and increasing to $123.0
million in 2003. In addition, we may incur more debt in the future. In addition,
dividends of approximately $126.0 million will accrue on the Series E preferred
stock through February 2005. No cash dividends are payable on the Series E
preferred stock until 2005, and at our option such dividends may continue to
accrue as liquidation preference. Dividends on the 6 3/4% Series F preferred
stock are cumulative from the date of issuance in an annual amount of
approximately $16.9 million. As a result of these factors, we expect to incur
substantial operating and net losses and negative operating cash flow for the
foreseeable future. We will need to obtain additional financing to pay our
expenses and to make payments on our debt. We cannot give you any assurance
about whether or when we will have sufficient revenues to satisfy our funding
requirements or pay our debt service and preferred stock obligations.
Our operating results in one or more future periods are likely to fluctuate
significantly and may fail to meet or exceed the expectations of securities
analysts or investors
Our annual and quarterly operating results are likely to fluctuate
significantly in the future due to numerous factors, many of which are outside
of our control. These factors include:
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. the rate of customer acquisition and turnover;
. the prices our customers are willing to pay which may decline due to
competitive factors;
. the amount and timing of expenditures relating to the expansion of our
services and infrastructure;
. the timing and availability of incumbent carrier central office collocation
facilities and transport facilities;
. our ability to effectively develop and market network features and
applications;
. the mix of our services that our customers purchase at different prices;
. our ability to scale our business to meet the demands of our customers;
. our ability to control our corporate overhead while rapidly growing our
business;
. the success of our relationships with our partners and distributors, including
MCI WorldCom, Microsoft, Qwest and Cisco;
. our ability to deploy our network on a timely basis;
. introduction of new services or technologies by our competitors;
. price competition;
. the ability of our equipment and service suppliers to meet our needs;
. regulatory developments, including interpretations of the 1996
Telecommunications Act;
. technical difficulties or network downtime;
. the success of our strategic alliances;
. the condition of the telecommunication and network service industries and
. general economic conditions.
Because of these factors, our operating results in one or more future
periods could fail to meet or exceed the expectations of securities analysts or
investors. In that event, any trading price of our common stock would likely
decline.
We depend on third parties for the marketing and sales of our services
We rely significantly on indirect sales channels for the marketing and
sales of our services. We will seek to continue to establish and maintain
relationships with numerous broadband service providers in order to gain access
to end-users. Our agreements to date with these broadband service providers are
non-exclusive, and we anticipate that future agreements will also be on a non-
exclusive basis, allowing these broadband service providers to sell services
offered by our competitors. These agreements are generally short term, and can
be cancelled by these broadband service providers without significant financial
consequence. We cannot control how these broadband service providers perform and
cannot be certain that their performance will be satisfactory to us or our
customers. Many of these companies have similar arrangements with our
competitors and also compete directly with us. If the number of customers we
obtain through indirect sales channels is significantly lower than our forecast
for any reason, or if these broadband service providers with which we have
contracted are unsuccessful in competing in their own intensely competitive
markets, these events would have a material and adverse effect on our business,
prospects, operating results and financial condition.
If forecasted sales for services sold directly to our business customers for a
particular period are not realized in that period due to the lengthy sales cycle
of our services, our operating results for that period will be harmed
The sales cycle of our network services can be very lengthy, particularly
for large businesses. Our sales cycle for large businesses typically lasts at
least six months. During this lengthy sales cycle, we will incur significant
expenses in advance of the receipt of revenues. If sales that we forecast for a
particular period do not occur because of our lengthy sales cycle, this event
could materially and adversely affect our business, prospects, operating results
and financial condition, during that period.
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We depend on incumbent carriers for collocation and transmission facilities
We must use copper telephone lines controlled by the incumbent carriers to
provide DSL connections to customers. We also depend on the incumbent carriers
for collocation and for a substantial portion of the transmission facilities we
use to connect our equipment in incumbent carrier central offices to our Metro
Service Centers. In addition, we depend on the incumbent carriers to test and
maintain the quality of the copper telephone lines that we use. In many cases,
we may be unable to obtain access to collocation and transmission facilities
from the incumbent carriers, or to gain access at acceptable rates, terms and
conditions, including timeliness. We have experienced, and expect to experience
in the future, lengthy periods between our request for and the actual provision
of the collocation space and copper telephone lines. An inability to obtain or
maintain adequate and timely access to collocation space or transmission
facilities on acceptable terms and conditions from incumbent carriers could have
a material and adverse effect on our business, prospects, operating results and
financial condition.
Because we compete with incumbent carriers in our markets, they may be
reluctant to cooperate with us. The incumbent carriers may experience, or claim
to experience, a shortage of collocation space or transmission capacity. If this
occurs, we may not have alternate means of connecting our DSL equipment with the
copper telephone lines or connecting our equipment in central offices to Metro
Service Centers. We have experienced rejections of some of our collocation
applications on the grounds that no space is available. We may receive
additional rejections in the future. The number of other competitive local
exchange carriers that request collocation space will also affect the
availability of collocation space and transmission capacity. If we are unable to
obtain physical collocation space or transmission capacity from our targeted
incumbent carriers, we may face delays, additional costs or an inability to
provide services in certain locations. Where we use virtual collocation in our
network, it reduces our control over our equipment, and therefore may reduce the
level of quality and service we provide to our customers. Delays in obtaining
access to collocation space and copper telephone lines or the rejection of our
applications for collocation could result in delays in, and increased expenses
associated with, the rollout of our services, which in turn could have a
material and adverse effect on our business, prospects, operating results and
financial condition.
We are unable to control the terms and conditions under which we gain access to
incumbent carrier collocation and transmission facilities
We cannot control the terms under which we collocate our equipment,
connect to copper telephone lines or gain the use of an incumbent carrier's
transmission facilities. State tariffs, state public utility commissions, the
Federal Communications Commission and interconnection agreements with the
incumbent carriers determine the price, terms and conditions under which
collocation space is made available, and they make these administrative
determinations in ongoing hearings. Interconnection agreements and state public
utility commissions also determine the terms and conditions of access to copper
telephone lines and other components of an incumbent carrier's network. We may
be unable to negotiate or enter into interconnection agreements on acceptable
terms or at all. In addition, we cannot be sure that incumbent carriers will
abide by their obligations under those agreements. Delays in obtaining
interconnection agreements would delay our entry into certain markets. In
addition, disputes may arise between us and the incumbent carriers with respect
to interconnection agreements, and we may be unable to resolve disputes in our
favor. If we are unable to enter into, or experience a delay in obtaining,
interconnection agreements, this inability or delay could adversely affect our
business, prospects, operating results and financial condition. Further, the
interconnection agreements are generally short term, and we may be unable to
renew the interconnection agreements on acceptable terms or at all. The state
commissions, the Federal Communications Commission and the courts oversee, in
varying degrees, interconnection arrangements as well as the terms and
conditions under which we gain access to incumbent carrier copper telephone
lines and transmission facilities. These government entities may modify the
terms or prices of our interconnection agreements and our access to incumbent
carrier copper telephone
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lines and transmission facilities in ways that would be adverse to our business.
The Federal Communications Commission and state regulatory commissions establish
the rates for DSL-capable copper telephone lines as well as other rates, terms
and conditions of our dealings with the incumbent carriers in ongoing public
hearings. Participation in these hearings will involve significant management
time and expense. Incumbent carriers may from time to time propose new rates,
and the outcomes of hearings and rulings could have a material and adverse
effect on our business, prospects, operating results and financial condition.
The market in which we operate is highly competitive, and we may not be able to
compete effectively, especially against established industry competitors with
significantly greater financial resources
We will face competition from many competitors with significantly greater
financial resources, well-established brand names and large, existing installed
customer bases. We expect the level of competition to intensify in the future.
We expect significant competition from incumbent local exchange carriers,
traditional and new interexchange carriers, other DSL providers, cable modem
service providers, Internet service providers, wireless and satellite data
service providers and other competitive carriers. Incumbent local exchange
carriers have existing metropolitan area networks and circuit-switched local
access networks. In addition, most incumbent local exchange carriers are
establishing their own Internet service provider businesses and are in some
stage of market trials and retail sales of DSL-based access services. Incumbent
local exchange carriers are aggressively marketing these services to their
residential customers at attractive prices. We believe that incumbent local
exchange carriers have the potential to quickly overcome many of the issues that
have delayed widespread deployment of DSL services in the past. It is possible
that present or future competitors may reduce prices for competitive services,
perhaps drastically. In addition, we may experience substantial customer
turnover in the future. Many providers of telecommunications and networking
services experience high rates of customer turnover.
Many of the leading traditional long distance carriers, including AT&T
Corporation, MCI WorldCom and Sprint, are expanding their capabilities to
support high-speed, end-to-end networking services. The newer long distance
carriers, including Williams, Level 3 Communications, Inc. and Qwest, are
building and managing high bandwidth, nationwide packet networks and partnering
with Internet service providers to offer services directly to the public. Cable
modem service providers, like Excite@Home Networks, are offering or preparing to
offer high-speed Internet access over hybrid fiber networks to consumers, and
@Work has positioned itself to do the same for businesses. Several new companies
are emerging as wireless, including satellite-based, data service providers.
Internet service providers, including some with significant and even nationwide
presences, provide Internet access to residential and business customers,
generally over the incumbent carriers' circuit switched networks, although some
offer competitive DSL-based access. Certain competitive carriers, including
Covad Communications Group, Inc. and NorthPoint Communications, Inc., offer
competitive DSL-based access services, and, like us, have attracted strategic
equity investors, marketing allies and product development partners. Others are
likely to do the same in the future. In addition, regional Internet service
providers and competitive carriers, including HarvardNet, Inc., Network Access
Solutions Corp. and DSL.net, Inc. offer competitive DSL-based services that
compete with the services we offer. As a result of increasing competition for
our services, we are experiencing substantial price competition, particularly
with respect to sales generated through our indirect sales channels.
Many of these competitors are offering, or may soon offer, technologies and
services that will directly compete with some or all of our service offerings.
Some of the technologies used by these competitors for local access connections
include ISDN, DSL, wireless data and cable modems. Some of the competitive
factors in our markets include transmission speed, reliability of service,
breadth of service availability, price, network security, ease of access and
use, content bundling, customer support, brand recognition, operating
experience, capital availability and exclusive contracts. We believe that we
compare unfavorably with many of our competitors with
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regard to, among other things, brand recognition, existing relationships with
end users, available pricing discounts, central office access, capital
availability and exclusive contracts. Substantially all of our competitors and
potential competitors have substantially greater resources than us. We may not
be able to compete effectively in our target markets. Our failure to compete
effectively would have a material and adverse effect on our business, prospects,
operating results and financial condition. For more details about our
competitors, please see Item 1 -Business - Competition.
Our network services may not achieve significant market acceptance because our
prices are often higher than those charged for competing services
Our prices are in some cases higher than those that our competitors charge
for some of their services. Prices for digital communications services have
fallen historically, and we expect prices in the industry in general, and for
the services we offer now and plan to offer in the future, to continue to fall.
We may be required to reduce prices periodically to respond to competition and
to generate increased sales volume. Our prices may not permit our network
services to gain a desirable level of commercial acceptance, and we may be
unable to sustain any current or future pricing levels. Due to these factors, we
cannot accurately forecast our revenues or the rate at which we will add new
customers.
Our services are subject to government regulation, and changes in current or
future laws or regulations could restrict the way we operate our business
A significant portion of the services that we offer through our
subsidiaries is subject to regulation at the federal, state and/or local levels.
Future federal or state regulations and legislation may be less favorable to us
than current regulation and legislation and therefore have an adverse impact on
our business, prospects, operating results and financial condition. In addition,
we may expend significant financial and managerial resources to participate in
rule-setting proceedings at either the federal or state level, without achieving
a favorable result. In particular, we believe that incumbent carriers will work
aggressively to modify or restrict the operation of many provisions of the 1996
Telecommunications Act. We expect incumbent carriers will pursue litigation in
courts, institute administrative proceedings with the Federal Communications
Commission and other regulatory agencies and lobby the United States Congress,
all in an effort to affect laws and regulations in a manner favorable to the
incumbent carriers and against the interest of competitive carriers such as us.
If the incumbent carriers succeed in any of their efforts, if these laws and
regulations change or if the administrative implementation of laws develops in
an adverse manner, these events could have a material and adverse effect on our
business, prospects, operating results and financial condition. For more details
about our regulatory situation, please see Item 1 - Business - Government
Regulation.
Our failure to manage growth could adversely affect us
We have rapidly and significantly expanded our operations. We anticipate
further significant expansion of our operations and the systems supporting those
operations in an effort to achieve our network rollout and deployment
objectives. Our expansion to date has strained our management, financial
controls, operations systems, personnel and other resources. Any future rapid
expansion would increase these strains. If our marketing strategy is successful,
we may experience difficulties responding to customer demand for services and
technical support in a timely manner and in accordance with their expectations.
As a result, rapid growth of our business would make it difficult to implement
successfully our strategy to provide superior customer service. To manage any
growth of our operations, we must:
. improve existing and implement new operational, financial and management
information controls, operational support systems, reporting systems and
procedures;
. hire, train and manage additional qualified personnel;
. expand and upgrade our core technologies; and
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. effectively manage multiple relationships with our customers, suppliers and
other third parties.
We may not be able to install operational support systems or management
information and control systems in an efficient and timely manner, and our
current or planned personnel, systems, procedures and controls may not be
adequate to support our future operations. Failure to manage our future growth
effectively could adversely affect the expansion of our customer base and
service offerings. Any failure to successfully address these issues could
materially and adversely affect our business, prospects, operating results and
financial condition.
Failure to effectively develop and market network features and applications
could limit our revenue growth
Our business model relies on network features and applications to
increase our revenues. We have only recently begun to develop these network
features and applications. In order to be successful, we must develop and
effectively market network features and applications that are widely accepted,
at profitable prices. We cannot assure you that we will be able to do so. Our
failure to develop and market these features and applications could materially
and adversely affect our business, prospects, operating results and financial
condition.
The telecommunications industry is undergoing rapid technological change, and
new technologies may be superior to the technology we use
The telecommunications industry is subject to rapid and significant
technological changes, such as continuing developments in DSL technology and
alternative technologies for providing high-speed data communications. We cannot
predict the effect of technological changes on our business. We will rely in
part on third parties, including certain of our competitors and potential
competitors, for the development of and access to communications and networking
technology. We expect that new products and technologies applicable to our
market will emerge. New products and technologies may be superior to and/or
render obsolete the products and technologies that we currently use. Our future
success will depend, in part, on our ability to anticipate and adapt to
technological changes and evolving industry standards. We may be unable to
obtain access to new technology on acceptable terms or at all, and we may be
unable to adapt to new technologies and offer services in a competitive manner.
Our joint development projects with Cisco and MCI WorldCom and our strategic
arrangement with Microsoft may not produce useful technologies or services for
us. Further, new technologies and products may not be compatible with our
technologies and business plan. In addition, many of the products and
technologies that we intend to use in our network services are relatively new
and unproven and may be unreliable.
We may be unable to effectively expand our network services and provide high
performance to a substantial number of end users
Due to the limited deployment of our network services, we cannot guarantee
that our network will be able to connect and manage a substantial number of end
users at high transmission speeds. We may be unable to scale our network to
service a substantial number of end users while achieving high performance.
Further, our network may be unable to achieve and maintain competitive digital
transmission speeds. While digital transmission speeds of up to 7.1 Mbps are
possible on certain portions of our network, that speed is not available over a
majority of our network. Actual transmission speeds on our network will depend
on a variety of factors and many of these factors are beyond our control,
including the type of DSL technology deployed, the distance an end user is
located from a central office, the quality of the telephone lines, the presence
of interfering transmissions on nearby lines and other factors. As a result, we
may not be able to achieve and maintain digital transmission speeds that are
attractive in the market.
Our services may suffer or be unavailable because the copper telephone lines we
require may be unavailable or in poor condition
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Our ability to provide DSL-based services to potential customers depends on
the quality, physical condition, availability and maintenance of copper
telephone lines within the control of the incumbent carriers. We believe that
the current condition of copper telephone lines in many cases will be inadequate
to permit us to fully implement our network services. In addition, the incumbent
carriers may not maintain the copper telephone lines in a condition that will
allow us to implement our network effectively. The copper telephone lines may
not be of sufficient quality or the incumbent carriers may claim they are not of
sufficient quality to allow us to fully implement or operate our network
services. Further, some telephone services employ technologies other than copper
lines, and DSL might not be available over these telephone lines.
Our success depends on our retention of certain key personnel and on the
performance of those personnel
Our success depends on the performance of our officers and key employees,
especially our Chief Executive Officer and our President and Chief Operating
Officer. Members of our senior management team have worked together for only a
short period of time. We do not have "key person" life insurance policies on any
of our employees nor do we have employment agreements for fixed terms with any
of our employees. Any of our employees, including any member of our senior
management team, may terminate his or her employment with us at any time. Given
our early stage of development, we depend on our ability to retain and motivate
high quality personnel, especially our management. Our future success also
depends on our continuing ability to identify, hire, train and retain highly
qualified technical, sales, marketing and customer service personnel. Moreover,
the industry in which we compete has a high level of employee mobility and
aggressive recruiting of skilled personnel. We may be unable to continue to
employ our key personnel or to attract and retain qualified personnel in the
future. We face intense competition for qualified personnel, particularly in
software development, network engineering and product management. For more
details about our officers and key employees, please see Item 1 - Business -
Employees.
We depend on third parties for equipment, installation and provision of field
service
We currently plan to purchase all of our equipment from many vendors and
outsource the majority of the installation and field service of our networks to
third parties. Our reliance on third party vendors involves a number of risks,
including the absence of guaranteed capacity and reduced control over delivery
schedules, quality assurance, production yields and costs. If any of our
suppliers reduces or interrupts its supply, or if any significant installer or
field service provider interrupts its service to us, this reduction or
interruption could disrupt our business. Although multiple manufacturers
currently produce or are developing equipment that will meet our current and
anticipated requirements, our suppliers may be unable to manufacture and deliver
the amount of equipment we order, or the available supply may be insufficient to
meet our demand. Currently, almost all of the DSL modem and DSL multiplexing
equipment we use for a single connection over a copper telephone line must come
from the same vendor since there are no existing interoperability standards for
the equipment used in our higher speed services. If our suppliers or licensors
enter into competition with us, or if our competitors enter into exclusive or
restrictive arrangements with the suppliers or licensors, then these events may
materially and adversely affect the availability and pricing of the equipment we
purchase and the technology we license.
A system failure or breach of network security could cause delays or
interruptions of service to our customers
Our operations depend on our ability to avoid damages from fires,
earthquakes, floods, power losses, excessive sustained or peak user demand,
telecommunications failures, network software flaws, transmission cable cuts and
similar events. A natural disaster or other unanticipated problem at our owned
or leased facilities could interrupt our services. Additionally, if an incumbent
carrier, competitive carrier or other service provider fails to provide the
communications capacity
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we require, as a result of a natural disaster, operational disruption or any
other reason, then this failure could interrupt our services.
Despite the implementation of security measures, our network may be
vulnerable to unauthorized access, computer viruses and other disruptive
problems. Corporate networks and Internet service providers have in the past
experienced, and may in the future experience, interruptions in service as a
result of accidental or intentional actions of Internet users, current and
former employees and others. Unauthorized access could also potentially
jeopardize the security of confidential information stored in the computer
systems of our customers, which might cause us to be liable to our customers,
and also might deter potential customers. Eliminating computer viruses and
alleviating other security problems may require interruptions, delays or
cessation of service to our customers and our customers' end users.
Interference or claims of interference could delay our rollout or harm our
services
All transport technologies deployed on copper telephone lines have the
potential to interfere with, or to be interfered with by, other transport
technologies on the copper telephone lines. We believe that our DSL
technologies, like other transport technologies, do not interfere with existing
voice services. We believe that a workable plan that takes into account all
technologies could be implemented in a scalable way across all incumbent
carriers using existing plant engineering principles. There are several
initiatives underway to establish national standards and principles for the
deployment of DSL technologies. We believe that our technologies can be deployed
consistently with these evolving standards. Nevertheless, incumbent carriers may
claim that the potential for interference permits them to restrict or delay our
deployment of DSL services. Interference could degrade the performance of our
services or make us unable to provide service on selected lines. The procedures
to resolve interference issues between competitive carriers and incumbent
carriers are still being developed, and these procedures may not be effective.
We may be unable to successfully negotiate interference resolution procedures
with incumbent carriers. Moreover, incumbent carriers may make claims regarding
interference or unilaterally take action to resolve interference issues to the
detriment of our services. State or federal regulators could also institute
responsive actions. Interference, or claims of interference, if widespread,
would adversely affect our speed of deployment, reputation, brand image, service
quality and customer satisfaction and retention.
We depend on third parties for fiber optic transport facilities
We depend on the availability of fiber optic transmission facilities from
third parties to connect our equipment within and between metropolitan areas.
These third party fiber optic carriers include long distance carriers, incumbent
carriers and other competitive carriers. Many of these entities are, or may
become, our competitors. This approach includes a number of risks. For instance,
we may be unable to negotiate and renew favorable supply agreements. Further, we
depend on the timeliness of these companies to process our orders for customers
who seek to use our services. We have in the past experienced supply problems
with certain of our fiber optic suppliers, and they may not be able to meet our
needs on a timely basis in the future. Moreover, the fiber optic transport
providers whose networks we lease may be unable to obtain or maintain permits
and rights-of-way necessary to develop and operate existing and future networks.
Uncertain federal and state tax and other surcharges on our services may
increase our payment obligations
Telecommunications providers pay a variety of surcharges and fees on their
gross revenues from interstate and intrastate services. The division of our
services between interstate and intrastate services is a matter of
interpretation, and in the future the Federal Communications Commission or
relevant state commission authorities may contest this division. A change in the
characterization of the jurisdiction of our services could cause our payment
obligations to increase. In addition,
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pursuant to periodic revisions by state and federal regulators of the applicable
surcharges, we may be subject to increases in the surcharges and fees currently
paid.
Our intellectual property protection may be inadequate to protect our
proprietary rights, and we may be subject to infringement claims
We rely on a combination of licenses, confidentiality agreements and other
contracts to establish and protect our technology and other intellectual
property rights. We have applied for trademarks and servicemarks on certain
terms and symbols that we believe are important for our business. We currently
have no patents or patent applications pending. The steps we have taken may be
inadequate to protect our technology or other intellectual property. Moreover,
our competitors may independently develop technologies that are substantially
equivalent or superior to ours. Third parties may assert infringement claims
against us and, in the event of an unfavorable ruling on any claim, we may be
unable to obtain a license or similar agreement to use technology we rely upon
to conduct our business. We also rely on unpatented trade secrets and know-how
to maintain our competitive positions, which we seek to protect, in part, by
confidentiality agreements with employees, consultants and others. However,
these agreements may be breached or terminated, and we may not have adequate
remedies for any breach. In addition, our competitors may otherwise learn or
discover our trade secrets. Our management personnel were previously employees
of other telecommunications companies. In many cases, these individuals are
conducting activities for us in areas similar to those in which they were
involved prior to joining us. As a result, we or our employees could be subject
to allegations of violation of trade secrets and other similar claims.
Risks associated with potential general economic downturn
In the last few years the general health of the economy, particularly the
economy of California where we have conducted a significant portion of our
operations to date, has been relatively strong and growing, a consequence of
which has been increasing capital spending by individuals and growing companies
to keep pace with rapid technological advances. To the extent the general
economic health of the United States or of California declines from recent
historically high levels, or to the extent individuals or companies fear a
decline is imminent, these individuals and companies may reduce expenditures
such as those for our services. Any decline or concern about an imminent decline
could delay decisions among certain of our customers to roll out our services or
could delay decisions by prospective customers to make initial evaluations of
our services. Any delays would have a material and adverse effect on our
business, prospects, operating results and financial condition.
We expect our stock price to be volatile
The trading price of our common stock has been and is likely to continue
to be highly volatile. Our stock price could fluctuate widely in response to
many factors, including the following:
. our historical and anticipated quarterly and annual operating results;
. announcements of new products or services by us or our competitors or new
competing technologies;
. the addition or loss of business or service provider customers;
. variations between our actual results and analyst and investor expectations;
. investor perceptions of our company and comparable public companies;
. conditions or trends in the telecommunications industry, including regulatory
developments;
. announcements by us of significant acquisitions, strategic partnerships, joint
ventures or capital commitments;
. additions or departures of key personnel;
. future equity or debt offerings or our announcements of such offerings; and
. general market and economic conditions.
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In addition, in recent years the stock market in general, and the Nasdaq
National Market and the market for Internet and technology companies in
particular, have experienced extreme price and volume fluctuations. These
fluctuations have often been unrelated or disproportionate to the operating
performance of these companies. These market and industry factors may materially
and adversely affect our stock price, regardless of our operating performance.
We have not paid and do not intend to pay dividends
We have not paid any dividends on our common stock, and we do not intend to
pay cash dividends on our common stock in the foreseeable future. Our current
financing documents contain provisions which restrict our ability to pay
dividends.
Anti-takeover provisions could negatively impact our stockholders
Our Board of Directors has adopted a stockholder rights plan. Our
stockholder rights plan would cause substantial dilution to any person or group
that attempts to acquire our company on terms not approved in advance by our
Board of Directors. In addition, some of the provisions that may be included in
our certificate of incorporation and bylaws may discourage, delay or prevent a
merger or acquisition at a premium price. These provisions include:
. authorizing the issuance of "blank check" preferred stock;
. providing for a classified Board of Directors with staggered, three-year
terms;
. eliminating the ability of stockholders to call a special meeting of
stockholders;
. limiting the removal of directors by the stockholders to removal for cause;
and
. requiring a super-majority stockholder vote to effect certain amendments.
In addition, certain provisions of the Delaware General Corporation Law and
our stockholder rights plan may deter someone from acquiring or merging with us,
including a transaction that results in stockholders receiving a premium over
the market price for the shares of common stock held by them. Section 203 of the
Delaware General Corporation Law also imposes certain restrictions on mergers
and other business combinations between us and any holder of more than 15% and
less than 85% of our common stock.
The indentures governing our 1998 senior discount notes, 1999 senior notes
and 2000 senior notes require us to offer to repurchase all such notes for 101%
of their principal amount or accreted value, as the case may be, plus any
accrued interest and liquidated damages, within 30 days after a change of
control. We might not have sufficient funds available at the time of any change
of control to make any required payment, as well as any payment that may be
required pursuant to any other outstanding indebtedness at the time, including
our indebtedness to equipment financing lenders, or outstanding preferred stock.
These covenants may also deter third parties from entering into a change of
control transaction with us.
The price of our common stock may decline due to shares eligible for future sale
Sales of substantial amounts of common stock in the public market following
this offering, or the appearance that a large number of shares is available for
sale, could adversely affect the market price for the common stock. In addition
to the adverse effect a price decline could have on holders of common stock,
that decline would likely impede our ability to raise capital through the
issuance of additional shares of common stock or other equity securities.
Item 2 - Properties
Our headquarters are located in facilities consisting of approximately 80,
000 square feet in Englewood, Colorado, which we occupy under a lease that
expires in January 2004. This lease may
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be extended. We also lease space for network equipment installations and
business offices in a number of other locations.
Item 3 - Legal Proceedings
In December 1998, we instituted an arbitration proceeding, before the
Public Utility Commission of Texas, with Southwestern Bell Telephone Company
regarding the terms of interconnection with Southwestern Bell in Texas. On
November 30, 1999 the Texas Public Utilities Commission Arbitrators issued an
award deciding most issues in favor of our positions, and ordered the parties to
conclude the negotiations by adopting language consistent with the award. On
February 7, 2000 the full Commission approved the interconnection agreement
proposed by the parties implementing the arbitrator's award, and rejected
requests by SBC for rehearing of the arbitrator's award. This order remains
subject to additional requests for rehearing or appeal.
In addition, on March 12, 1999, our subsidiary Rhythms Links Inc. filed a
complaint with the Oregon Public Utilities Commission against U S WEST
requesting that the Oregon Public Utilities Commission determine that U S WEST
permit collocation by Rhythms Links in several central offices in which U S WEST
claimed that it had no space available. U S WEST agreed to permit Rhythms Links
collocation in the disputed central offices just before hearings were scheduled
to begin in June 1999.
On February 18, 1999, we filed a complaint for declaratory relief in San
Diego County Superior Court, North County against Thomas R. Lafleur. Mr. Lafleur
is a former employee of the Company. After he left, he was sent a check for the
repurchase or buy-back of his unvested shares. Mr. Lafleur refused to cash this
check. The declaratory relief action is to determine that his shares were
unvested and thus properly repurchased. We have since amended our complaint to
allege additional causes of action, including fraud, breach of contract, and
interference with prospective economic advantage. On or about March 26, 1999,
Mr. Lafleur filed an answer to the complaint and also filed a cross-complaint
against us. The cross-complaint has been amended a number of times and seeks
compensatory and punitive damages. We intend to defend vigorously against the
claims asserted in the current cross-complaint. We are currently accounting for
these 438,115 shares as treasury stock.
We are aware of the filing of a legal action by i2 Technologies, Inc. in
the United States District Court in the Northern District of Texas on January 7,
2000 challenging our use of the name "Rhythms" on various grounds and alleging
that our use of that name infringes certain trademarks owned by i2 Technologies.
We deny that it infringes any legitimate trademark rights of i2 Technologies, in
part on the grounds that we have priority in the Rhythms name with respect to
the goods and services provided by us and that our use of those marks is not
likely to cause confusion among the consumers of our services, and the services
provided by i2 Technologies, respectively. We intend to vigorously defend the
continued use of our name in the manner in which we have used it in the past and
our interests in the name "Rhythms".
In addition, we are subject to state commission, Federal Communications
Commission and court decisions as they relate to the interpretation and
implementation of the 1996 Telecommunications Act, the interpretation of
competitive carrier interconnection agreements in general and our
interconnection agreements in particular. In some cases, we may be deemed to be
bound by the results of ongoing proceedings of these bodies. We therefore may
participate in proceedings before these regulatory agencies or judicial bodies
that affect, and allow us to advance, our business plans.
Item 4 - Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the quarter
ended December 31, 1999.
40
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PART II
Item 5 - Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's common stock is traded on the Nasdaq National Market under
the symbol "RTHM." As of March 15, 2000, there were approximately 329
shareholders of record of the Company's common stock, par value $.001 per share.
The common stock began trading on the Nasdaq National Market on April 7, 1999,
the date of our initial public offering. Prior to April 7, 1999, there was no
public market for our common stock. The following table sets forth, for the
period indicated, the high and low closing daily bid prices for our common stock
as quoted by the Nasdaq National Market.
- --------------------------------------------------------------------------------
Year Ended December 31, 1999: High Low
---- ----
- --------------------------------------------------------------------------------
Second Quarter (from April 7, 1999 through June 30, 1999) $93.13 $45.25
- --------------------------------------------------------------------------------
Third Quarter................................................68.94 30.00
- --------------------------------------------------------------------------------
Fourth Quarter...............................................45.50 26.69
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Dividend Policy
We have not paid dividends on our common stock and currently intend to
continue this policy in order to retain earnings for use in our business. In
addition, the terms of the indentures governing our 1998 senior discount notes,
1999 senior notes and 2000 notes contain restrictions on our ability to pay
dividends or other distributions.
Sales of Unregistered Securities
Since our incorporation in February 1997, we have issued and
sold unregistered securities as follows (adjusted for subsequent stock splits):
(1) An aggregate of 2,161,764 shares of common stock was
issued in private placements in February through June 1997 to
Enterprise Partners in connection with our initial funding. The
consideration received for such shares was $901.
(2) An aggregate of 6,140,000 shares of Series A preferred stock
(which were converted into 14, 736,000 shares of common stock)
was issued in a private placement in July 1997 to Brentwood
Venture Capital, Enterprise Partners, Kleiner Perkins Caufield &
Byers, the Sprout Group and certain other purchasers pursuant to
a Series A Preferred Stock Purchase Agreement. The consideration
received for such shares was $6,138,500.
(3) An aggregate of 6,350,000 shares of Series A preferred stock
(which were converted into 15,240,000 shares of common stock) was
issued in a private placement in December 1997 to Brentwood
Venture Capital, Enterprise Partners, Kleiner Perkins Caufield &
Byers, the Sprout Group and certain other purchasers pursuant to
a Series A Preferred Stock Purchase Agreement and a Subsequent
Closing Purchase Agreement. The consideration received for such
shares was $6,350,000.
(4) An aggregate of 365,094 shares of Series A preferred stock (which
were converted into 876,226 shares of common stock) was issued in
a private placement in February 1998 to Catherine Hapka in
connection with the Series A Preferred Stock Purchase Agreement,
the Subsequent Closing Purchase Agreement and an employment
agreement between us and Ms. Hapka. The consideration received
for such shares was $292,075.
(5) An aggregate of 4,044,943 shares of Series B preferred stock
(which were converted into 9,707,863 shares of common stock) was
issued in a private placement in March 1998 to Brentwood Venture
Capital, Enterprise Partners, Kleiner Perkins Caufield & Byers,
the Sprout Group and Enron Communications Group, Inc. The
consideration received for such shares was $18,000,000.
(6) In May 1998, we issued 290,000 units consisting of 13 1/2% senior
discount notes due 2008 and warrants to purchase an aggregate of
4,732,800 shares of common stock with exercise prices of $0.004
per share to Merrill Lynch & Co. and Donaldson, Lufkin & Jenrette
Securities Corporation, as initial purchasers, for resale to
qualified institutional buyers. Merrill Lynch & Co. and
Donaldson, Lufkin & Jenrette Securities Corporation received
commissions of $5,262,920 for acting as initial purchasers in
connection with this transaction. Effective November 20, 1998, we
completed an exchange offer of the 13 1/2% senior discount notes
that allowed for registration of such notes under the Securities
Act of 19333, as amended. Of the original issue notes, $289.0
million were tendered for exchange.
(7) In May 1998, we issued to Sun Financial Group, Inc., now GATX
Capital Corporation, a warrant to purchase 574,380 shares of
common stock with an exercise price of $1.85 per share in
connection with an equipment lease financing.
(8) In March 1999, we issued to MCI WorldCom Venture Fund, Inc. and
to Microsoft Corporation 3,731,410 and 3,731,409 shares of Series
C preferred stock, respectively, and issued to each of them a
warrant to purchase 720,000 shares of common stock for an
aggregate purchase price of $60.0 million.
(9) In April 1999, we issued to Qwest 932,836 shares and 441,176
shares of Series C and Series D preferred stock, respectively,
and warrants to purchase 180,000 shares of common stock for an
aggregate purchase price of $15.0 million.
(10) Effective April 12, 1999, we completed an initial public offering
of our common stock. A total of 10,781,250 common shares were
issued at $21.00 per share for aggregate proceeds of
approximately $210.1 million after payment of underwriting fees
and related issue costs. Upon completion of the offering, all
classes of preferred stock automatically converted to common
stock, resulting in an additional 51,076,051 shares of common
stock being issued leaving no shares of preferred stock issued
and outstanding.
(11) Effective August 17, 1999, we completed a secondary public
offering of our common stock in a transaction that allowed
certain holders of warrants issued in connection with the 13 1/2%
senior discount notes to exercise those warrants and sell the
resulting common stock at $29.00 per share. In connection with
the secondary offering, the underwriters of the offering were
allowed to purchase 594,279 shares of common stock from us for
$29.00 per share. The sale of these shares was completed on
September 14, 1999 for aggregate proceeds of $16.4 million, net
of underwriting discount.
(12) In February 2000, we issued $300.0 million aggregate principal
amount of 14% senior notes due 2010 for net proceeds of
approximately $291.3 million. The notes are redeemable at our
option, in whole or in part, at any time after February 15, 2005,
at predetermined redemption prices, together with any accrued and
unpaid interest through the date of redemption. Upon a change of
control, each holder of the senior notes may require us to
purchase the notes at 101% of the principal amount thereof, plus
any accrued and unpaid interest to the date of purchase. The 2000
senior notes contain restrictive covenants, including limitations
on future indebtedness, restricted payments, transactions with
affiliates, liens, sale of stock of subsidiaries, entering new
lines of business, dividends, mergers and transfer of assets.
(13) In February and March 2000, we issued 3,000,000 shares of 6 3/4%
Series F cumulative convertible preferred stock in a private
placement. Net proceeds were approximately $291.0 million. Each
share of Series F preferred stock is convertible into 2.35 shares
of common stock at any time at a conversion price of $42.56 per
share, subject to adjustment. Holders of Series F preferred stock
are entitled to dividends on a cumulative basis at an annual rate
of 6 3/4%, payable quarterly in cash. The preferred stock is
redeemable at our option, in whole or in part, at any time after
March 6, 2003, at predetermined redemption prices, together with
any accrued and unpaid dividends through the date of redemption.
Upon a change of control, each holder of the preferred shares may
require us to purchase any or all of the shares at 100% of the
liquidation preference, plus any accrued and unpaid dividends to
the date of purchase. The Series F preferred stock is subject to
mandatory redemption on March 3, 2012.
(14) In March 2000, we sold $250.0 million of 8 1/4% Series E
convertible preferred stock to Hicks, Muse, Tate & Furst Inc.
(Hicks Muse). Each share of Series E preferred stock is
convertible into shares of common stock at any time at a
conversion price of $37.50 per share, subject to adjustment. In
addition, we issued Hicks Muse warrants to purchase 1,875,000
shares of common stock at an exercise price of $45.00 per share,
exercisable for three years; 1,875,000 shares of common stock at
an exercise price of $50.00 per share, exercisable for five
years; and 1,875,000 shares of common stock at an exercise price
of $55.00 per share, exercisable for seven years.
(15) From August 1997 through December 31, 1999, we granted stock
options to purchase an aggregate of 17,407,722 shares of common
stock to employees and consultants with aggregate exercise prices
ranging from $0.21 to $56.94 per share pursuant to our stock
option plan. As of December 31, 1999, 8,592,013 shares of common
stock have been issued upon exercise of options.
No underwriters were used in connection with these sales and
issuances except for the issuance of the senior discount notes and related
warrants in (6) above, issuances of common stock in our public and secondary
offerings in (11) and (12) above and issuance of senior notes in (12) above and
issuances of preferred stock in (13) above. The sales and issuances of these
securities except for those in (6), (11) and (12) above were exempt from
registration under the Securities Act pursuant to Rule 701 promulgated
thereunder on the basis that these securities were offered and sold either
pursuant to a written compensatory benefit plan or pursuant to written contracts
relating to consideration, as provided by Rule 701, or pursuant to Section 4 (2)
thereof on the basis that the transactions did not involve a public offering.
The sales and issuance in (6), (12), (13) and (14) above were exempt from
registration under the Securities Act pursuant to Section 4 (2) and, in
connection with the resale by the initial purchasers of the securities described
in (6) above, Rule 144A thereunder.
Use of Proceeds
We have and continue to use aggregate net proceeds from our initial
public offering as follows:
. to fund the expenditures incurred in the continuing deployment of network
services in our existing markets, as well as our planned rollout in
additional markets;
. for expenses associated with the continued development of our sales and
marketing activities;
. to fund the addition of subscribers or end-users;
. to fund operating losses;
. to pay our debt obligations; and
. for general corporate purposes.
We have also invested them in short-term, investment grade securities
to the extent permitted by the covenants governing the notes and our existing
senior discount notes and our existing debt and any statistical asset tests
imposed by the Investment Company Act of 1940.
The actual amounts we spend have varied and will vary significantly
depending upon a number of factors, including future revenue growth, if any,
capital expenditures, the amount of cash generated by our operations and other
factors, many of which are beyond our control. Additionally, we may modify the
number, selection and timing of our entry with respect to any or all of our
targeted markets. Accordingly, our management has and will retain broad
discretion in the allocation of the net proceeds.
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Item 6 - Selected Financial Data
The following table sets forth the Selected Consolidated Financial Data for
the Company for the periods from inception on February 27, 1997 to December 31,
1997 and for the years ended December 31, 1998, and 1999, and is based on the
audited Consolidated Financial Statements of the Company and its subsidiaries.
Such data should be read in conjunction with the Company's Consolidated
Financial Statements and the notes thereto incorporated into this report in Item
8 and Management's Discussion and Analysis of Financial Condition and Results of
Operations.
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
________________________________________________________________________________________________
Period From
February 27, 1997,
(Inception)
Through Year Ended
December 31, December 31,
-------------------------
1997 1998 1999
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statement of Operations:
Revenue $ - $ 528 $ 11,089
Operating expenses:
Network and service costs - 4,695 68,161
Selling, marketing, general and administrative 2,342 22,428 110,947
Depreciation and amortization 1 1,081 12,639
Amortized deferred business acquisition costs - - 4,765
Deferred compensation 192 725 3,742
-------------------------------------------------------------------------------------------------
Total operating expenses 2,535 28,929 200,254
-------------------------------------------------------------------------------------------------
Loss from operations (2,535) (28,401) (189,165)
Interest and other income (expense) 113 (7,933) (29,715)
-------------------------------------------------------------------------------------------------
Net loss $ (2,422) $ (36,334) $ (218,880)
-------------------------------------------------------------------------------------------------
Net loss per share (basic and diluted) $ (1.12) $ (12.18) $ (4.15)
-------------------------------------------------------------------------------------------------
Balance Sheet:
Cash, cash equivalents, and short-term investments $ 10,166 $ 136,812 $ 340,255
Restricted cash $ - $ - $ 96,233
Total assets $ 12,241 $ 171,726 $ 685,424
Total debt $ 568 $ 158,270 $ 506,140
Mandatorily redeemable common stock warrants $ - $ 6,567 $ 42
Total stockholders' equity (deficit) $ 10,346 $ (6,747) $ 116,287
Other Financial Data:
EBITDA (1) $ (2,342) $ (26,562) $ (167,870)
Adjusted EBITDA (2) $ (2,342) $ (24,970) $ (146,250)
Net cash used for operating activities $ (1,560) $ (19,024) $ (153,774)
Net cash used for investing activities $ (1,345) $ (139,032) $ (471,401)
Net cash provided by financing activities $ 13,071 $ 169,205 $ 652,107
-------------------------------------------------------------------------------------------------
</TABLE>
_____________
(1) EBITDA consists of the net loss excluding net interest, depreciation and
amortization of capital assets, deferred business acquisition costs and
deferred compensation expense. EBITDA is presented to enhance an
understanding of our operating results and is not intended to represent
cash flow or results of operations in accordance with generally accepted
accounting principles for the period indicated and may be calculated
differently than EBITDA for other companies.
(2) Adjusted EBITDA reflects EBITDA excluding total operating lease expenses to
GATX Capital Corporation (GATX) and Cisco Systems Capital Corporation
(Cisco). No amounts were incurred to GATX and Cisco for operating leases in
1997. Total operating expenses for the year ended December 31, 1998 include
$1.6 million of operating lease expense to GATX. Total operating expenses
for the year ended December 31, 1999 include $21.6 million of operating
lease expense to GATX and Cisco.
42
<PAGE>
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
All statements contained within the Management's Discussion and Analysis
of Financial Condition and Results of Operations that are not statements of
historical fact constitute "Forward-Looking Statements" within the meaning of
Section 21E of the Securities Exchange Act. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that could
cause the actual results of the Company to be materially different from
historical results or from any future results expressed or implied by such
forward-looking statements. Readers are urged to consider statements that
include the terms "believe", "belief", "expects", "plans", "anticipates",
"intends" or the like to be uncertain and forward-looking. Forward-looking
statements also include projections of financial performance, statements
regarding management's plans and objectives and statements concerning any
assumptions relating to the foregoing. Certain important factors regarding the
Company's business, operations and competitive environment, which may cause
actual results to vary materially from these forward-looking statements, are
discussed above under the caption "Risk Factors"
Overview
We are a leading service provider of broadband local access communication
services to businesses and consumers. We began offering commercial services in
the United States in April 1998. As of December 31, 1999, we offered our
services in 38 markets and 67 of the largest of the 314 Metropolitan Statistical
Areas (MSAs) in the U.S., and our national DSL network passed 30 million homes
and businesses. We intend to continue our network rollout into an additional 32
markets and 41 MSAs by the end of 2000.
Since our inception in February 1997, our primary activities have consisted
of:
. obtaining required governmental authorizations;
. negotiating and executing interconnection agreements with incumbent
carriers;
. entering into strategic alliances;
. identifying collocation space and locations for our connection points,
Metro Service Centers and business offices;
. acquiring and deploying equipment and facilities;
. launching service trials;
. hiring management and other personnel;
. raising capital;
. forming a joint venture company, Rhythms Canada, to develop a Canadian
DSL network;
. adding end user subscribers to our network;
. conducting various marketing and sales activities;
. launching a national brand campaign;
. creating and expanding relationships with broadband service providers;
. implementing process improvement and quality programs; and
. developing and integrating our operations support system and other back
office systems.
During 1999, we continued the development of our business operations as
follows:
. entered 28 new markets for a total of 38 markets at December 31, 1999;
. added 1,025 central office locations for a total of 1,225 central
offices at December 31, 1999;
. added 12,000 DSL lines for a total of 12,500 DSL lines at December 31,
1999; and
43
<PAGE>
. increased headcount by 1,090 employees for a total of approximately
1,250 employees at December 31, 1999.
We have incurred operating losses, net losses and negative operating
cash flow for each month since our formation. As of December 31, 1999, we had an
accumulated deficit of $257.6 million. We intend to substantially increase our
capital expenditures and operating expenses in an effort to rapidly expand our
network infrastructure, network features and applications, and add end user
subscribers. We expect to incur substantial operating losses, net losses and
negative cash flow during our network build and initial penetration of each new
market we enter. These losses are expected to continue for at least the next
several years.
Factors Affecting Operations
Revenue
The following factors affect our revenue:
. Service Offerings. We derive a majority of our operating revenue from
broadband local connection services, metropolitan area inter-network
connection services and installation. For broadband local connection
services, we bill our customers a flat rate, monthly recurring charge
based on the data transfer speeds selected by the end user. We also bill
our broadband local connection services customers for nonrecurring
service activation and installation charges on each line. For our
metropolitan area internetwork connection services, we bill fixed,
monthly recurring charges and nonrecurring charges to each customer for
the high-speed connection between our Metro Service Center and the
customer's router or switch. To encourage potential customers to adopt
our services, we sometimes offer reduced metropolitan area internetwork
connection service prices for an initial period of time. In some
situations, we reduce the nonrecurring service activation and
installation charges on our broadband local connection services for
customers who sign long-term contracts of greater than 12 months. We
expect that, as a result of competitive forces and our evolving service
offerings, our prices will decline over time. We expect that the mix of
services our customers purchase from us will change from time to time
and that a mix more heavily weighted toward the lower priced services
would reduce the average revenue per end-user subscriber.
. Number and Penetration of Target Markets. The total number of markets in
which we choose to provide our service offerings, as well as the
penetration within each market, will affect our revenues. We base our
target market assessment on the number of local area networks in each
market, which we believe is the best indication of data-intensive
business density and potential customers for our service offerings. For
each target market, we expect to collocate in the appropriate number of
incumbent local exchange carrier (ILEC) central offices to cover 70% of
the total market opportunity within the metropolitan area.
. Turnover. To date, our customer turnover has been minimal. We expect
this to increase in the future as competition intensifies.
Network and Service Costs
Our network and service costs are generally composed of the following:
. End-User Subscriber Installation Charges. In each market, we require a
number of field service technicians to perform installation services at
end-user locations. We currently outsource most of this function.
44
<PAGE>
. Customer Premise Equipment. We provide a DSL modem or router for use at
the end user's location. We purchase this equipment from various DSL
equipment providers.
. Monthly Recurring and Nonrecurring Line and Service Charges. We pay
ILECs a one-time installation and activation fee and a monthly service
fee for each copper telephone line.
. Metropolitan Area Network Transport Charges. We incur monthly recurring
and nonrecurring charges for transport between our connection points and
our Metro Service Centers. These charges are typically for DS-3 services
from a competitive local exchange carrier (CLEC) or ILEC. These charges
also include metropolitan area internetwork connections to our network.
. Network Facilities Operating Expenses. We incur various monthly
recurring costs at our connection points and Metro Service Centers.
These costs include facility rent and utility costs.
. Wide Area Network Connection Charges. We pay interexchange carriers a
one-time installation and activation fee and a monthly service fee for
leasing wide area network connections over a frame relay or Asynchronous
Transfer Mode (ATM) network.
. Equipment Operating Lease Expenses. We currently take advantage of
short-term operating leases to finance the acquisition of substantially
all of our network equipment, including DSL multiplexers, ATM switches
and routers.
. Line Repair and Support Costs. Similar to other telecommunication
providers, we estimate that a small percentage of our lines may require
repair or support. These costs will consist of field dispatch labor and
a portion of our Network Operations Center costs.
Selling, Marketing, General and Administrative
Our selling, marketing, general and administrative expenses include
customer service and technical support, information systems, billing and
collections, general management and overhead, and administrative functions.
Headcount in functional areas, such as customer service, engineering and
operations, will increase as we expand our network, and add new customers and
end-user subscribers.
. Selling and Marketing Costs. Our sales and marketing efforts focus on
attracting and retaining broadband service providers and business
customers, adding end-users to our network, and building and maintaining
our brand.
. General and Administrative Costs. As we expand our network, we expect
the number of employees located in specific markets to grow. We also use
outside contractors, in addition to our own employees, for certain
activities. Certain functions, such as network operations, information
systems, marketing, quality, national sales management, finance, billing
and site planning, are likely to remain centralized in order to achieve
economies of scale.
Depreciation and Amortization
Depreciation expense arises from the capitalization of our equipment and
furniture. Collocation fees are capitalized and amortized over an estimated
useful life of ten years.
45
<PAGE>
Results of Operations
1999 Compared to 1998
Revenue
We recorded $11.1 million in revenue in 1999 compared to $0.5 million in
revenue in 1998. Revenue consisted of net monthly recurring service fees of $7.5
million in 1999 compared to $0.3 million in 1998. Nonrecurring net installation
revenue totaled $3.5 million for 1999 compared to $0.2 million in 1998. We
recorded late fees of $0.1 million in 1999 compared to none in 1998. The
substantial increase in revenue in 1999 is a result of our increased sales and
marketing efforts and continued network deployment as more fully detailed above.
Each new market we enter provides us with an additional revenue opportunity, but
also higher costs until we have an established customer base in the market.
Network and Service Costs
Our network and service costs for 1999 were $68.2 million compared to $4.7
million in 1998. The significant increase in network and service costs in 1999
is a result of our continued network deployment as more fully detailed above.
Selling, Marketing, General and Administrative
Our selling, marketing, general and administrative expenses were $110.9
million in 1999, compared to $22.4 million for the same period one year ago.
This increase reflects our continued growth in staffing levels, sales and
marketing efforts, and legal expenses associated with the development and launch
of new markets as more fully detailed above.
Depreciation and Amortization
Depreciation and amortization in 1999 was $12.6 million, a significant
increase over the $1.1 million recorded in 1998. This increase reflects the
rapid expansion of our network, as discussed above, and includes amortization of
collocation fees and depreciation on operating equipment as we begin service in
each new location. We expect depreciation and amortization to continue to
increase in the future as we continue to expand our network.
During the first and second quarters of 1999, we entered into strategic
arrangements with Microsoft Corp. and Qwest Communications International Inc. In
addition to their investments in our company totaling $45.0 million, the
strategic arrangements provide for certain other business relationships.
Combined, these business relationships along with certain warrant issuances are
valued at $23.2 million and we have capitalized these costs as deferred assets.
These assets are being amortized over three- and five-year periods. Accordingly,
during 1999 we recorded $4.8 million in amortization for deferred business
acquisition costs that have no corresponding amortization in the prior year.
Deferred compensation expense increased to $3.7 million in 1999 as
compared to $0.7 million for the same period one year ago and reflects the
granting of stock options to our employees and officers with per share exercise
prices below the per share fair values of our common stock at the dates of
grant. We are amortizing the deferred compensation over the vesting period of
the applicable options.
Net Interest Income and Expense
46
<PAGE>
During 1999, we recorded interest income of $22.7 million, compared to $5.8
million in 1998. The increase between years resulted primarily from a
substantial increase in invested cash balances. As of December 31, 1999, we had
unrestricted cash and investments totaling $340.3 million, compared to
unrestricted cash and investments of $136.8 million at December 31, 1998. The
increase during 1999 resulted from a variety of financing activities, including:
. issuing Series C and Series D preferred stock and warrants for cash
proceeds totaling $75.0 million in March and April 1999;
. issuing common stock upon our initial public offering in April 1999 for
net cash proceeds of $210.1 million;
. issuing 12 3/4% senior debt in April 1999 for net cash proceeds of
$314.5 million;
. executing additional equipment lease lines of $100.0 million;
. issuing common stock upon our secondary public offering in September
1999 for net cash proceeds of $16.4 million.
Interest expense and amortized debt discount and issue costs increased
significantly to $52.5 million in 1999 as compared to $13.8 million in 1998.
This increase primarily resulted from the senior notes we issued in April 1999.
Income Taxes
We generated net operating loss carryforwards of $2.1 million, $21.2
million, and $186.9 million in 1997, 1998, and 1999, respectively. We expect
significant consolidated losses for the foreseeable future that will generate
additional net operating loss carryforwards. However, our ability to use net
operating losses may be subject to annual limitations. In addition, income taxes
may be payable during this time due to operating income in certain tax
jurisdictions. In the future, if we achieve operating profits and the net
operating losses have been exhausted or have expired, we may incur significant
tax expense. We continue to be in a net operating loss tax position through
December 31, 1999; consequently, we have not recorded a provision for income
taxes for periods through December 31, 1999.
1998 Compared to Period From February 27, 1997, (Inception) to December 31, 1997
Revenue
We did not offer commercial services in 1997 and, as a result, did not
record any revenue in 1997. During 1998, we continued the development of our
business operations, commencing service in the San Diego market in April; the
San Francisco, Oakland/East Bay and San Jose markets in July; the Los Angeles
and Orange County markets in September and the Chicago market in October. We
recorded revenue of $0.5 million during this period, which was primarily from
DSL service and installation charges, net of discounts given to customers.
Network and Service Costs
Since we did not offer commercial services in 1997, we did not record any
network or service costs in 1997. In 1998, we recorded network and service costs
of $4.7 million. We expect network and service costs to increase significantly
in future periods as we expand our network into additional markets.
Selling, Marketing, General and Administrative
From inception through December 31, 1997, selling, marketing, general and
administrative expenses were $2.3 million and consisted primarily of salaries
and legal and consulting fees incurred to establish a management team and
develop our business. In 1998, we recorded selling,
47
<PAGE>
marketing, general and administrative expenses of $22.4 million. This increase
is attributable to growth in staffing levels, increased marketing efforts
coinciding with the launch of commercial services and increased legal fees
associated with the development of additional markets.
Depreciation and Amortization
Depreciation from network equipment was minimal since substantially all of
this equipment was leased. Depreciation and amortization was $1,000 for the
period from inception through December 31, 1997, and was $1.1 million in 1998.
The increase was due to the commencement of our operations in 1998.
Other Income and Expense
Other income and expense consists primarily of interest income from our
cash and short-term investments and interest expense associated with our debt.
From inception through December 31, 1997, net interest income was $0.1 million,
which was primarily attributable to the interest income earned from the proceeds
raised in our Series A preferred stock financing. In 1998, we recorded net
interest expense of $8.0 million, consisting of interest income of $5.8 million
generated from invested cash balances, offset by $13.8 million in interest
expense. The increase in the interest expense is substantially due to the
accretion of interest on the senior discount notes issued in May 1998.
Income Taxes
We generated net operating loss carryforwards of $2.1 million from
inception to December 31, 1997, and $21.2 million during 1998. We expect
significant consolidated losses for the foreseeable future which will generate
additional net operating loss carryforwards. However, our ability to use net
operating losses may be subject to annual limitations. In addition, income taxes
may be payable during this time due to operating income in certain tax
jurisdictions ons. In the future, if we achieve operating profits and the net
operating losses have been exhausted or have expired, we may incur significant
tax expense. We recognized no provision for taxes because we operated at a loss
throughout 1997 and 1998.
Liquidity and Capital Resources
We have substantial indebtedness and debt service obligations. As of
December 31, 1999, we had $506.1 million of total indebtedness. In addition, the
development and expansion of our business requires significant capital
expenditures. These capital expenditures primarily include network build costs
such as the procurement, design and construction of our connection points and
one or two Metro Service Center locations in each market, as well as other costs
that support our network design.
The number of targeted central offices in each market varies, as does the
average capital cost to build our connection points in such market. Capital
expenditures, including payments for collocation fees, were $193.3 million in
1999. We expect our capital expenditures to be higher in future periods, arising
primarily from payments of collocation fees and the purchase of infrastructure
equipment necessary for the development and expansion of our network.
Through December 31, 1999, we have financed our operations and network
primarily through:
. private placements of equity totaling $105.8 million, net;
executing equipment lease lines totaling $126.5 million;
. issuing 13 1/2% senior discount notes in May 1998 for $144.0 million
in netproceeds;
. issuing common stock in April 1999 in our initial public offering for
$210.1 million in net proceeds;
. issuing 12 3/4% senior notes in April 1999 for $314.5 million in
48
<PAGE>
. net proceeds;
. issuing common stock in September 1999 in a secondary public offering
for $16.4 million in net proceeds
Subsequent to December 31, 1999, we have:
. increased equipment lease lines by an aggregate of $75 million;
. issued 14% senior notes in February 2000 for $291.3 million in net
proceeds; and
. issued 6 3/4% Series F cumulative convertible preferred stock in
February and March 2000 for $291.0 million in net proceeds.
. issued $250 million of Series E convertible preferred stock to Hicks
Muse in a privately negotiated transaction in March 2000;
Refer to Note 10 of the accompanying consolidated financial statements for terms
and descriptions of these transactions.
The indentures for the 1998 senior discount notes and the 1999 and 2000
senior notes contain covenants that limit our ability to:
. pay dividends on, redeem or repurchase our capital stock;
. incur additional debt;
. make investments;
. consolidate, merge or transfer all or substantially all of our assets;
and
. make dividend or other payments to us by our restricted subsidiaries.
As of December 31, 1999, we had $436.5 million in cash and investments and
we had an accumulated deficit of $257.6 million. Of this cash, $96.2 million is
restricted in accordance with the terms of the 1999 senior notes.
In 1999, the net cash used in our operating activities was $153.8 million.
This cash was used for a variety of operating purposes, including salaries,
consulting and legal expenses, network operations and overhead expenses. Our net
cash used for investing activities in 1999 was $471.4 million and was used
primarily for purchases of short-term investments and equipment and payments of
collocation fees. Net cash provided by financing activities in 1999 was $652.1
million and primarily came from the issuance of equity and senior notes as
described above.
In 1998, the net cash used in our operating activities was $19.0 million.
This cash was used for a variety of operating purposes, including salaries,
consulting and legal expenses, network operations and overhead expenses. Our
net cash used for investing activities in 1998 was $139.0 million and was used
primarily for purchases of short-term investments and equipment and payments of
collocation fees. Net cash provided by financing activities in 1998 was $169.2
million and primarily came from the issuance of the senior discount notes and
from the issuance of preferred stock.
Since inception through December 31, 1997, the net cash used in our
operating activities was $1.6 million. The net cash used for operations was
primarily due to working capital requirements and net losses, partially offset
by increases in accounts payable and accrued expenses. Our net cash used for
investing activities for the period ended December 31, 1997 was $1.3 million.
This cash was used for purchases of equipment and collocation fees. Net cash
provided by financing activities for the period ended December 31, 1997 was
$13.1 million and primarily came from the issuance of preferred stock and
proceeds from bank borrowings.
Our capital requirements may vary based upon the timing and success of our
rollout and as a result of regulatory, technological and competitive
developments, or if:
49
<PAGE>
. demand for our services or our anticipated cash flow from operations is
less or more than expected;
. our development plans or projections change or prove to be inaccurate;
. we engage in any acquisitions; or
. we accelerate deployment of our network services or otherwise alter the
schedule or targets of our rollout plan.
We believe that our cash and investment balances as of December 31, 1999,
together with the proceeds of the events subsequent to December 31, 1999, and
anticipated future revenue generated from operations, will be sufficient to fund
our operating losses, capital expenditures, lease payments and interest payments
through approximately December 2001. We expect our operating losses and capital
expenditures to increase substantially in the near-term, primarily due to our
network expansion. We expect that significant additional financing will be
required in the future. We may attempt to raise financing through some
combination of commercial bank borrowings, leasing, vendor financings, or the
private or public sale of equity or debt securities. Future equity or debt
financings may not be available to us at all or, if available, may not be on
favorable terms. If we are unable to obtain financing in the future, we will
continue the expansion of our operations on a reduced scale based on our
existing capital resources.
Impact of the Year 2000 Issue
Many computer programs have been written using two digits rather than four
to define the applicable year. This posed a problem at the end of the century
because these computer programs might recognize a date using "00" as the year
1900 rather than the year 2000. This, in turn, could have resulted in major
system failures or miscalculations, and was generally referred to as the "Year
2000 issue." We formulated and, to a large extent, effected a plan to address
our Year 2000 issues.
We are not currently aware of any Year 2000 compliance problems relating to
our systems that would have a material adverse effect on our business, financial
condition and operating results. In response to the Year 2000 issue we
implemented changes to our existing information technology systems through a
combination of modifications and upgrades to Year 2000 compliant software. We
evaluated our non-information technology systems and believe these systems are
Year 2000 compliant.
We incurred minimal costs associated with identifying and addressing Year
2000 compliance.
The Year 2000 issue did not have a material adverse effect on our business,
financial condition or operating results. However, despite all our efforts to
date toward ensuring Year 2000 compliance, latent issues may still surface in
the future.
Item 8 - Financial Statements and Supplementary Data
The financial statements required pursuant to this item are included
in Item 14 of this Form-10K and are presented beginning on page F-1.
Item 9 - Change in and Disagreements with Accountants
Not applicable.
Item 10 - Directors and Executive Officers of the Company
The information required by this item concerning the Company's directors,
is incorporated by reference to the information set forth in the Company's proxy
statement (2000 Proxy Statement)
50
<PAGE>
for the 2000 annual meeting of stockholders to be filed with the SEC within 120
days after the end of the Company's fiscal year ended December 31, 1999
Item 11 - Executive Compensation
The information required by this item regarding executive compensation is
incorporated by reference to the information set forth in the Company's 2000
Proxy Statement.
Item 12 - Security Ownership of Certain Beneficial Owners and Management
The information required by this item regarding security ownership of
certain beneficial owners and management is incorporated by reference to the
information set forth in the Company's 2000 Proxy Statement.
Item 13 - Certain Relationships and Related Transactions
The information required by this item regarding certain relationships and
related transactions is incorporated by reference to the information set forth
in the Company's 2000 Proxy Statement.
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K
Financial Statements:
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Operations and Comprehensive Income for the
period from February 27, 1997, (Inception) through December 31, 1997
and the years ended December 31, 1998 and 1999
Consolidated Statements of Stockholders' Equity for the period from
February 27, 1997, (Inception) through December 31, 1997 and the
years ended December 31, 1998 and 1999
Consolidated Statements of Cash Flows for the period from February 27,
1997, (Inception), through December 31, 1997 and the years ended
December 31, 1998 and 1999
Financial Statement Schedules:
Report of Independent Accountants On Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts
All other schedules have been omitted because the information is not
required or is included in the consolidated financial statements
Exhibits:
3.1** Restated Certificate of Incorporation of the Company.
3.2** Certificate of Designation of Series 1 Junior Participating Preferred
Stock of Company.
3.3** Restated Bylaws of the Company.
3.4 Certificate of Designation of 6 3/4% Series F Convertible Preferred Stock.
3.5 Certificate of Designation of 8.25% Series E Convertible Preferred Stock.
4.1** Form of Certificate of common stock.
4.2* Indenture, dated as of May 5, 1998, by and between the Company and State
Street Bank and Trust Company of California, N.A., as trustee, including form of
the Company's 13 1/2% Senior Discount Notes due 2008, Series A and form of
Company's 13 1/2% Senior Discount Notes due 2008, Series B.
4.3* Warrant Agreement, dated as of May 5, 1998, by and between the Company and
State Street Bank and Trust Company of California, N.A.
4.4* Warrant Registration Rights Agreement, dated as of May 5, 1998, by and
among the Company and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, and Donaldson, Lufkin & Jenrette Securities Corporation.
4.5** Warrant to Purchase Shares of Common Stock, dated May 19, 1998, by and
between the Company and Sun Financial Group, Inc.
4.6** Common Stock Purchase Warrant, dated March 3, 1999, by and between the
Company and MCI WorldCom Venture Fund, Inc.
4.7** Common Stock Purchase Warrant, dated March 16, 1999, by and between the
Company and Microsoft Corporation.
4.8** Warrant to Purchase Shares of Common Stock, dated March 31, 1999, by and
between Company and GATX Capital Corporation.
4.9** Warrant Purchase Agreement, dated as of April 6, 1999, by and between
Company and MCI WorldCom Venture Fund, Inc.
4.10** Common Stock Purchase Warrant, dated April 6, 1999, by and among Company
and MCI WorldCom Venture Fund, Inc.
4.11** Common Stock Purchase Warrant, dated April 6, 1999, by and among the
Company and U.S. Telesource, Inc.
4.12** Common Stock Purchase Warrant, dated April 5, 1999, by and among Company
and Cisco Systems Capital Corporation.
4.13** Rights Agreement, dated April 2, 1999, by and among Company and American
Securities Transfer & Trust, Inc.
4.14*** Indenture, dated as of April 23, 1999, by and between the Company and
State Street Bank and Trust Company of California, N.A., as trustee, including
form of the Company's 12 3/4% Senior Notes due 2009, Series A and form of the
Company's 12 3/4% Senior Notes due 2009, Series B
4.15*** Notes Registration Rights Agreement, dated as of April 23, 1999, by and
among the Company and Merrill Lynch & Co., Merrill Lynch, Pierce Fenner & Smith
Incorporated, Salomon Smith Barney Inc. and Chase Securities Inc.
4.16*** Pledge and Escrow Agreement, dated as of April 23, 1999, from the
Company as Pledgor to State Street Bank and Trust Company of California, N.A.,
as trustee.
4.17**** Amendment No. 1 to Warrant Agreement, dated as of August , 1999 between
the Company and State Street Bank and Trust Company of California, N.A.
4.18 Indenture, dated February 23, 2000. by and between the Company and State
Street Bank and Trust Company of California, N.A., as trustee, including form of
the Company's 14% Senior Notes due 2010, Series A and form of the Company's 14$
Senior Notes due 2010, Series B.
4.19 Notes Registration Rights Agreement, dated as of February 23, 2000, among
the Company, Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner and Smith
Incorporated, and Salomon Smith Barney Inc., Chase Securities Inc., and Credit
Suisse First Boston.
4.20 Registration Rights Agreement, dated March 3, 2000, by and among the
Company and Merrill Lynch, Pierce, Fenner and Smith Incorporated and Salomon
Smith Barney Inc.
4.21 Registration Rights Agreement, dated March 16, 2000, by and among the
Company and the entities listed on Schedule I thereto.
9.1* Voting Trust Agreement, dated as of May 5, 1998, by and among Sprout
Capital VII, L.P., Donaldson Lufkin & Jenrette Securities Corporation, and First
Union Trust Company, National Association, as trustee.
9.2* Voting Trust Agreement, dated as of March 12, 1998, by and between Enron
Communications Group, Inc. and the Company, as trustee.
10.1* Series A Preferred Stock Purchase Agreement, dated July 3, 1997, by and
among the Company and the Investors listed on Schedule A thereto.
10.2* Subsequent Closing Purchase Agreement, dated December 23, 1997, by and
among the Company and the Investors listed on Schedule A thereto.
10.3* Series B Preferred Stock Purchase Agreement, dated March 12, 1998, by and
among the Company and the Investors listed on Schedule A thereto.
10.4** Enterprise Services Solution Agreement between Cisco Systems, Inc. and
the Company, dated December 3, 1998
10.5** Series C Preferred Stock Purchase Agreement, dated March 3, 1999, by and
among the Company and MCI WorldCom Venture Fund, Inc.
10.6** Amended and Restated Investors' Rights Agreement, dated March 3, 1999, by
and among the Company and the Investors listed on Schedule A thereto.
10.7** Agreement, dated March 3, 1999, by and between the Company and MCI
WorldCom, Inc.
10.8** Series C Preferred Stock and Warrant Purchase Agreement, dated March 16,
1999, by and among the Company and Microsoft Corporation.
10.9** Amended and Restated Investors' Rights Agreement, dated March 16, 1999,
by and among the Company and the Investors listed on Schedule A thereto.
10.10** Distribution Agreement, dated March 16, 1999, by and among the Company
and Microsoft Corporation.
10.11* Master Lease Agreement No. 1642 and Addendum thereto, each dated November
19, 1997, and Second Addendum thereto, dated as of May 19, 1998, between the
Company and Sun Financial Group, Inc.
10.12** Business Lease (Single Tenant) between the Company and BR Venture, LLC
dated September 1998.
10.13* Employment Agreement between the Company and Catherine M. Hapka, dated
June 10, 1997.
10.14* 1997 Stock Option/Stock Issuance Plan.
10.15** 1999 Stock Incentive Plan.
10.16** 1999 Employee Stock Purchase Plan.
10.17* Form of Indemnification Agreement between the Company and each of its
directors.
10.18* Form of Indemnification Agreement between the Company and each of its
officers.
10.19* QuickStart Loan and Security Agreement, dated October 29, 1997, between
the Company and Silicon Valley Bank.
10.20** Third Addendum, dated March 31, 1999, to Master Lease Agreement, dated
November 19, 1997, by and among Company and GATX Capital Corporation
10.21** Master Lease Agreement, dated March 31, 1999, by and among Company and
GATX Capital Corporation.
10.22** First Addendum, dated March 31, 1999, to Master Lease Agreement, dated
March 31, 1999, by and among Company and GATX Capital Corporation.
10.23** Amendment No. 1, dated April 6, 1999, to Framework Agreement, dated
March 3, 1999, by and among the Company and MCI WorldCom, Inc.
10.24** Series C Preferred Stock and Warrant Purchase Agreement, dated April 6,
1999, by and among the Company and U.S Telesource, Inc.
10.25** Series D Preferred Stock Purchase Agreement, dated April 6, 1999, by and
among the Company and the Investors listed on Schedule A thereto.
10.26** Amended and Restated Investors' Rights Agreement, dated April 6, 1999,
by and among the Company and the Investors listed on Schedule A thereto.
10.27** Lease Agreement, dated April 5, 1999, by and among the Company and Cisco
Systems Capital Corporation.
10.28*** Amendment No. 2, dated May 10, 1999, to Framework Agreement, dated
March 3, 1999, by and among the Company and MCI WorldCom, Inc.
10.29**** Employment Agreement with Steve Stringer.
10.30**** Employment Agreement with Michael Lanier.
10.31 *****Master Lease Agreement, dated July 30, 1999, by and between the
Company and GATX Capital Corporation
10.32 ****** ACI Plus Service Agreement, dated April 6, 1999, by and between the
Company and Qwest Communications Corporation.
10.33 Joint Venture Agreement, dated January 1, 2000, by and between the
Company, Rhtyms Links, Inc. and Optel Communications Corporation.
10.34 Preferred Stock and Warrant Purchase Agreement, dated February 6, 2000 by
and between the Company and the Purchasers listed on Schedule I thereto.
10.35 Purchase Agreement, dated February 16, 2000, by and between the Company
and the Initial Purchasers listed on Schedule I thereto.
10.36 Purchase Agreement, dated February 28, 2000 by and between the Company
and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Salomon Smith Barney Inc.
10.37 Employment Agreement with David J. Shimp.
10.38 Employment Agreement with Scott C. Chandler.
21.1** Subsidiaries of the Company.
23.1 Consent of PricewaterhouseCoopers
24.1 Powers of Attorney (included on signature page).
99.3**** Plus Service Agreement, dated April 6, 1999, by and between the Company
and Qwest Communications Corporation.
* Previously filed with the Commission as an exhibit to the registration
statement on Form S-4 (File No. 333-59393) and incorporated herein by reference.
II-6
**Previously filed with the Commission as an exhibit to the registration
statement on Form S-1 (File No. 333-72409) and incorporated herein by reference.
*** Previously filed with the Commission as an exhibit to the registration
statement on Form S-4 (File No. 333-82637) and incorporated herein by reference.
****Previously filed with the Commission as an exhibit to the registration
statement on Form S-1 (File No. 333-82867) and incorporated herein by reference.
*****Previously filed with the Commission as an exhibit to Form 10-Q filed
November 11, 1999 and incorporated herein by reference.
******Previously filed with the Commission as an exhibit to Form 10-Q filed
August 11, 1999 and incorporated herein by reference.
<PAGE>
Reports on Form 8-K
1. The Company filed no current reports on Form 8-K in the fourth quarter
ended December 31, 1999.
52
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the securities exchange
act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
RHYTHMS NETCONNECTIONS INC.
Date: March 29, 2000 By: /s/ Scott C. Chandler
-------------------------------------
Scott C. Chandler,
Chief Financial Officer
(Principal Financial and Accounting
Officer)
Know all men by these presents, that each person whose signature appears below
constitutes and appoints Catherine M. Hapka or Scott C. Chandler, his or her
attorney-in-fact, with power of substitution in any and all capacities, to sign
any amendments to this Annual Report on Form 10-K, and to file the same with
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that the
attorney-in-fact or his substitute or substitutes may do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Date: March 29, 2000 By: /s/ Catherine M. Hapka
-------------------------------------
Catherine M. Hapka,
Chairman and Chief Executive Officer
Date: March 29, 2000 By: /s/ Steve Stringer
-------------------------------------
Steve Stringer,
President and Chief Operating Officer
Date: March 29, 2000 By: /s/ Scott C. Chandler
-------------------------------------
Scott C. Chandler,
Chief Financial Officer
Date: March 29, 2000 By: /s/ Kevin R. Compton
-------------------------------------
Kevin R. Compton
Director
Date: March 29, 2000 By: /s/ Susan Mayer
-------------------------------------
Susan Mayer,
Director
Date: March 29, 2000 By: /s/ William R. Stensrud
-------------------------------------
William R. Stensrud,
Director
Date: March 29, 2000 By: /s/ John L. Walecka
---------------------------
John L. Walecka,
Director
Date: March 29, 2000 By: /s/ Edward J. Zander
----------------------------
Edward J. Zander,
Director
53
<PAGE>
Index to Financial Statements
-----------------------------
RHYTHMS NETCONNECTIONS INC.
Contents
Report of Independent Accountants............................................F-1
Financial Statements:
Consolidated Balance Sheets..........................................F-2
Consolidated Statements of Operations................................F-3
Consolidated Statements of Cash Flows................................F-4
Consolidated Statements of Stockholders' Equity......................F-5
Notes to Consolidated Financial Statements...........................F-7
54
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders
of Rhythms NetConnections Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and comprehensive income, of cash flows,
and of stockholders' equity present fairly, in all material respects, the
financial position of Rhythms NetConnections Inc. and its subsidiaries at
December 31, 1999 and 1998, and the results of their operations and their cash
flows for the period from February 27, 1997, (Inception) through December 31,
1997, and for each of the two years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
February 29, 2000, except for Note 10,
as to which the date is March 16, 2000
F-1
<PAGE>
RHYTHMS NETCONNECTIONS INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
December 31,
--------------------------
ASSETS 1998 1999
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 21,315 $ 48,247
Short-term investments 115,497 292,008
Restricted cash - 36,707
Accounts, loans, interest, and other receivables, net 2,376 10,844
Inventory 340 4,071
Prepaid expenses and other current assets 230 8,460
- ----------------------------------------------------------------------------------------------------------------
Total current assets 139,758 400,337
- ----------------------------------------------------------------------------------------------------------------
Equipment and furniture, net 11,510 124,831
Collocation fees, net 13,804 57,421
Restricted cash - 59,526
Deferred business acquisition costs, net of accumulated amortization of $0 and $4,765 - 18,425
Deferred debt issue costs, net of accumulated amortization of $216 and $924 6,304 16,194
Other assets 350 8,690
- ----------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 171,726 $685,424
================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------
Current liabilities:
Current portion of long-term debt $ 333 $ 333
Accounts payable 10,601 30,895
Interest payable 39 8,787
Accrued expenses and other current liabilities 2,816 23,163
- ----------------------------------------------------------------------------------------------------------------
Total current liabilities 13,789 63,178
Long-term debt 472 111
Senior notes payable 157,465 505,696
Other liabilities 180 110
- ----------------------------------------------------------------------------------------------------------------
Total liabilities 171,906 569,095
- ----------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 9)
Mandatorily redeemable common stock warrants 6,567 42
- ----------------------------------------------------------------------------------------------------------------
Stockholders' equity (deficit):
Preferred stock 17 -
Common stock, $0.001 par value; 250,000,000 shares authorized;
8,042,530 shares issued as of 1998, 78,255,707 shares issued as of 1999 8 78
Treasury stock, at cost; 438,115 shares as of 1998 and 988,894 shares as of 1999 (18) (469)
Additional paid-in capital 37,212 373,604
Warrants - 10,397
Deferred compensation (5,210) (12,320)
Accumulated deficit (38,756) (257,636)
Accumulated other comprehensive income - 2,633
- ----------------------------------------------------------------------------------------------------------------
Total stockholders' equity (deficit) (6,747) 116,287
- ----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 171,726 $685,424
================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
RHYTHMS NETCONNECTIONS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Period From
February 27, 1997, Year Ended
(Inception) Through December 31,
December 31, ----------------------------
1997 1998 1999
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue:
Service and installation, net $ - $ 528 $ 11,089
Operating Expenses:
Network and service costs - 4,695 68,161
Selling, marketing, general and administrative 2,342 22,428 110,947
Depreciation and amortization 1 1,081 12,639
Amortization of deferred business acquisition costs - - 4,765
Deferred compensation 192 725 3,742
Total operating expenses 2,535 28,929 200,254
Loss from operations (2,535) (28,401) (189,165)
Other Income (Expense):
Interest income 114 5,813 22,673
Interest expense (including amortized debt
discount and issue costs) (1) (13,779) (52,537)
Other income - 33 149
Total other income (expense) 113 (7,933) (29,715)
Net Loss $ (2,422) $ (36,334) $ (218,880)
Other comprehensive income - - 2,633
Total Comprehensive Income (Loss) $ (2,422) $ (36,334) $ (216,247)
Net Loss Per Share:
Basic $ (1.12) $ (12.18) $ (4.15)
Diluted $ (1.12) $ (12.18) $ (4.15)
Shares Used in Computing Net Loss Per Share:
Basic 2,161,764 2,984,216 52,770,402
Diluted 2,161,764 2,984,216 52,770,402
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
RHYTHMS NETCONNECTIONS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Period From Year Ended
February 27, 1997, December 31,
(Inception) Through -----------------------------
December 31, 1997 1998 1999
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (2,422) $ (36,334) $ (218,880)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization of equipment, furniture, and collocation fees 1 539 12,639
Amortization of deferred business acquisition costs - - 4,765
Amortization of debt discount and deferred debt issue costs - 13,882 23,939
Amortization of deferred compensation 265 725 3,742
Amortization of gain on sale of equipment to leasing company - - (142)
Loss on sale of equipment to leasing company - 387 -
Changes in assets and liabilities:
Increase in accounts, loans, interest, and other receivables, net - (2,376) (8,468)
Increase in inventory - (340) (3,731)
Increase in prepaid expenses and other current assets (95) (135) (8,230)
Increase in other assets (32) (318) (382)
Increase in accounts payable 388 2,287 11,807
Increase in interest payable - 39 8,748
Increase in accrued expenses and other current liabilities 335 2,440 20,347
Increase in other liabilities - 180 72
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash used for operating activities (1,560) (19,024) (153,774)
- ---------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Purchases of short-term investments - (451,870) (451,660)
Maturities of short-term investments - 336,373 275,149
Purchases of government securities as restricted cash - - (96,233)
Investment in common stock - - (5,325)
Purchases of equipment and furniture (1,018) (9,973) (147,358)
Payments of collocation fees (327) (13,562) (45,974)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (1,345) (139,032) (471,401)
- ---------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Proceeds from leasing company for equipment - 6,606 23,755
Proceeds from issuance of senior notes and warrants - 150,365 325,000
Payments of debt issue costs - (6,519) (10,598)
Proceeds from borrowings on long-term debt 568 432 -
Repayments of long-term debt - (195) (361)
Proceeds from issuance of common stock 13 242 248,748
Proceeds from issuance of preferred stock and warrants 12,490 18,292 75,000
Payments of equity issue costs - - (17,473)
Bank overdraft - - 8,487
Purchase of treasury stock - (18) (451)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 13,071 169,205 652,107
- ---------------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 10,166 11,149 26,932
Cash and cash equivalents at beginning of period - 10,166 21,315
- ---------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 10,166 $ 21,315 $ 48,247
=================================================================================================================================
Supplemental schedule of cash flow information:
Cash paid for interest $ 3 $ 66 $ 19,850
=================================================================================================================================
Supplemental schedule of non-cash financing activities:
Equipment and furniture purchases payable $ 604 $ 7,363 $ 547
Business acquisition costs from issuance of preferred stock and warrants $ - $ - $ 22,010
Warrants issued to leasing companies $ - $ - $ 1,180
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
RHYTHMS NETCONNECTIONS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Treasury Stock
$0.001 par value $0.001 par value at Cost
----------------------- ------------------- -------------------
Shares Amount Shares Amount Shares Amount
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock to Founders - $ - 2,161,764 $ 2 - $ -
at inception
Issuance of Series A preferred stock for cash 12,490,000 12 - - - -
Issuance of common stock upon exercise
of options - - 320,458 - - -
Grant of options to purchase Series A
preferred stock - - - - - -
Deferred compensation from grants of
options to purchase common stock - - - - - -
Amortization of deferred compensation - - - - - -
Net loss - - - - - -
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 12,490,000 12 2,482,222 2 - -
Issuance of Series A preferred stock for cash 365,094 1 - - - -
Issuance of Series B preferred stock for cash 4,044,943 4 - - - -
Issuance of common stock upon exercise
of options - - 5,560,308 6 - -
Purchase of treasury stock for cash - - - - 438,115 (18)
Deferred compensation from grants of
options to purchase common stock - - - - - -
Amortization of deferred compensation - - - - - -
Reversal of deferred compensation from
cancellation of grants to purchase
common stock - - - - - -
Net loss - - - - - -
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 16,900,037 $ 17 8,042,530 $ 8 438,115 $ (18)
</TABLE>
<TABLE>
<CAPTION>
Additional Total
Paid-In Deferred Accumulated Stockholders'
Capital Compensation Deficit Equity (Deficit)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Issuance of common stock to Founders $ - $ - $ - $ 2
at inception
Issuance of Series A preferred stock for cash 12,477 - - 12,489
Issuance of common stock upon exercise
of options 12 - - 12
Grant of options to purchase Series A
preferred stock 73 - - 73
Deferred compensation from grants of
options to purchase common stock 1,450 (1,450) - -
Amortization of deferred compensation - 192 - 192
Net loss - - (2,422) (2,422)
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 14,012 (1,258) (2,422) 10,346
Issuance of Series A preferred stock for cash 291 - - 292
Issuance of Series B preferred stock for cash 17,996 - - 18,000
Issuance of common stock upon exercise
of options 236 - - 242
Purchase of treasury stock for cash - - - (18)
Deferred compensation from grants of
options to purchase common stock 4,908 (4,908) - -
Amortization of deferred compensation - 725 - 725
Reversal of deferred compensation from
cancellation of grants to purchase
common stock (231) 231 - -
Net loss - - (36,334) (36,334)
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $ 37,212 $ (5,210) $ (38,756) $ (6,747)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
RHYTHMS NETCONNECTIONS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Treasury Stock
$0.001 par value $0.001 par value at cost Additional
------------------- ------------------- ------------------- Paid-in
Shares Amount Shares Amount Shares Amount Captial
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 16,900,037 $ 17 8,042,530 $ 8 438,115 $ (18) $ 37,212
Issuance of common stock in initial public
offering - - 10,781,250 11 - - 226,395
Issuance of common stock upon exercise of
options for cash - - 2,711,247 3 - - 3,333
Issuance of common stock in secondary
offering - - 594,279 - - - 17,233
Issuance of common stock upon cashless
exercise of warrants - - 4,954,085 5 - - 6,520
Issuance of Series C preferred stock and
warrants for cash 8,395,655 8 - - - - 60,368
Issuance of Series D preferred stock and
warrants for cash 441,176 - - - - - 6,317
Business relationship value arising from
issuance of Series C and D preferred stock - - - - - - 21,100
Costs arising from issuances of Series C
and D preferred stock - - - - - - (245)
Conversion of preferred stock to common
upon initial public offering (25,736,868) (25) 51,076,051 51 - - (26)
Costs arising from public offerings - - - - - - (17,224)
Purchase of treasury stock for cash - - - - 550,779 (451) -
Issuance of warrants to leasing companies - - - - - - -
Issuance of warrants to business partner - - - - - - -
Stock issuance under employee stock
purchase plan - - 96,265 - - - 1,769
Deferred compensation from grants of
options to purchase common stock - - - - - - 11,428
Amortization of deferred compensation - - - - - - -
Reversal of deferred compensation from
cancellation of grants to purchase
common stock - - - - - - (576)
Net loss - - - - - - -
Unrealized gain on available-for-sale
securities - - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 - $ - 78,255,707 $ 78 988,894 $ (469) $ 373,604
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other Total
Deferred Accumulated Comprehensive Stockholders'
Warrants Compensation Deficit Income Equity (Deficit)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1998 $ - $ (5,210) $ (38,756) $ - $ (6,747)
Issuance of common stock in initial public
offering - - - - 226,406
Issuance of common stock upon exercise of
options for cash - - - - 3,336
Issuance of common stock in secondary
offering - - - - 17,233
Issuance of common stock upon cashless
exercise of warrants - - - - 6,525
Issuance of Series C preferred stock and
warrants for cash 7,124 - - - 67,500
Issuance of Series C preferred stock and
warrants for cash 1,183 - - - 7,500
Business relationship value arising from
issuance of Series C and D preferred stock - - - - 21,100
Costs arising from issuances of Series C
and D preferred stock - - - - (245)
Conversion of preferred stock to common
upon initial public offering - - - - -
Costs arising from public offerings - - - - (17,224)
Purchase of treasury stock for cash - - - - (451)
Issuance of warrants to leasing companies 1,180 - - - 1,180
Issuance of warrants to business partner 910 - - - 910
Stock issuance under employee stock
purchase plan - - - - 1,769
Deferred compensation from grants of
options to purchase common stock - (11,428) - - -
Amortization of deferred compensation - 3,742 - - 3,742
Reversal of deferred compensation from
cancellation of grants to purchase
common stock - 576 - - -
Net loss - - (218,880) - (218,880)
Unrealized gain on available-for-sale
securities - - - 2,633 2,633
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 $ 10,397 $ (12,320) $ (257,636) $ 2,633 $ 116,287
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
RHYTHMS NETCONNECTIONS INC.
Notes to Consolidated Financial Statements
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Operations
Rhythms NetConnections Inc. (the Company), a Delaware corporation, was organized
under the name Accelerated Connections Inc. effective February 27, 1997. The
Company's name was changed to Rhythms NetConnections Inc. as of August 15, 1997.
The Company is in the business of providing broadband local access communication
services to businesses and consumers. The Company's services include high-speed
"always on" connections to the Internet and to private networks. The Company
began offering commercial services in the U.S. in April 1998.
The Company's ultimate success depends upon, among other factors, rapidly
expanding the geographic coverage of its network services; entering into
interconnection agreements with ILECs, some of which are competitors or
potential competitors of the Company; deploying network infrastructure;
attracting and retaining customers; accurately assessing potential markets;
continuing to develop and integrate its operational support system and other
back office systems; obtaining any required governmental authorizations;
responding to competitive developments; continuing to attract, retain and
motivate qualified personnel; and continuing to upgrade its technologies and
commercialize its network services incorporating such technologies. There can be
no assurance that the Company will be successful in addressing these matters and
failure to do so could have a material adverse effect on the Company's business,
prospects, operating results and financial condition. As the Company continues
the development of its business, it will seek additional sources of financing to
fund its development. If unsuccessful in obtaining such financing, the Company
will continue expansion of its operations on a reduced scale based on its
existing capital resources.
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements include the transactions and
balances of Rhythms NetConnections Inc. and its wholly owned subsidiaries
Rhythms Links Inc. and Rhythms Links Inc. - Virginia (since February 1998). All
significant intercompany balances and transactions have been eliminated in
consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting periods. Actual results
could differ from those estimates and assumptions.
Revenue Recognition
Revenue consists of recurring fees for monthly DSL service, and nonrecurring
fees for equipment and installation. Customer contracts are renewable and range
from one to three years in duration with payments due on a monthly basis.
Monthly recurring service revenue is recorded in the month the services are
rendered. Revenue for installations is recognized to the extent of installation
costs in the month incurred. Costs in excess of revenue related to installation
services are deferred and amortized to network and service costs on a straight-
line basis over the term of the customer contracts.
F-7
<PAGE>
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, money market funds, certificates
of deposit, obligations of the U.S. government and its agencies and commercial
paper with a maturity of three months or less at the time of purchase. Included
in accounts payable are outstanding checks in excess of cash balances of $8.5
million at December 31, 1999.
Short-Term Investments
Short-term investments consist of obligations of the U.S. government and its
agencies and commercial paper that have a maturity between 91 days and one year
from the date of purchase. Management determines the appropriate classification
of marketable debt and equity securities at the time of purchase.
Restricted Cash
Restricted cash is made up of a portfolio of U.S. government securities
purchased to secure payment of the first six scheduled interest payments on the
1999 senior notes.
Fair Value of Financial Instruments
The carrying amounts reported in the balance sheets for cash and cash
equivalents, short-term investments, accounts receivable, and accounts payable
approximate fair value because of the immediate or short-term maturity of these
financial instruments. The carrying amounts reported for long-term debt other
than the 12 3/4% senior notes and 13 1/2% senior discount notes approximate fair
value based upon management's best estimates of what interest rates would be
available for the same or similar instruments. The senior notes are publicly
traded securities. The combined quoted fair market value and the combined
carrying amount of the senior notes at December 31, 1999 are $471.9 million and
$505.7 million, respectively.
Investment in OCI Communications Inc.
On October 29, 1999, the Company completed a strategic investment in OCI
Communications Inc. (OCI), a provider of telecommunications services in Canada.
In exchange for a $5.3 million cash investment, the Company received warrants
convertible into 763,680 shares of Class B non-voting stock in OCI. These
warrants were converted in December 1999. As part of this investment, the
Company received various rights, including the ability to appoint a
representative to OCI's Board of Directors, among others. This investment is
classified as an available-for-sale security and is carried at fair value, with
the unrealized gains and losses, net of tax, reported as a separate component of
stockholders' equity. As part of this strategic relationship, in January 2000,
the Company formed a joint venture with OCI to offer DSL-based services in
selected Canadian markets. See Note 10.
Inventory
Inventory consists of communications equipment that will be installed at
customer locations. Inventory is accounted for using the first-in, first-out
method at the lower of cost or market.
Equipment and Furniture
Equipment and furniture consists of purchased equipment, furniture, computer
software, and leasehold improvements. Equipment and furniture is recorded at
cost. Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, generally three to seven years or the lease term, if
shorter. When equipment and furniture are retired, sold or otherwise disposed
of, the cost and related accumulated depreciation are removed from the accounts,
and gains and losses resulting from such transactions are reflected in
operations.
F-8
<PAGE>
Collocation Fees
Collocation fees represent nonrecurring fees paid to secure central office space
for location of certain Company equipment. The fees are amortized over their
estimated useful lives of ten years.
Impairment of Long-Lived Assets
The Company investigates potential impairments of its long-lived assets on an
exception basis when evidence exists that events or changes in circumstances may
have made recovery of an asset's carrying value unlikely. An impairment loss is
recognized when the sum of the expected undiscounted future net cash flows is
less than the carrying amount of the asset. No such losses have been identified.
Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist primarily of cash equivalents and short-term
investments. Cash in excess of operating requirements is conservatively invested
in money market funds, certificates of deposit with high quality financial
institutions, obligations of the U.S. government and its agencies, and
commercial paper rated A-1, P-1 to minimize risk.
At December 31, 1998 and 1999, accounts receivable balances from two significant
customers were 22.4% and 33.2%, respectively, of the total net accounts
receivable balance and 50.4% and 40.8%, respectively, of revenues. Ongoing
credit evaluations of customers' financial condition are performed and,
generally, no collateral is required. The Company maintains an allowance for
potential credit losses and such losses, in the aggregate, have not exceeded
management's expectations. At December 31, 1998 and 1999, the allowance for
doubtful accounts was $50,000 and $0.4 million, respectively. The Company's
customer base is widespread geographically.
Advertising Costs
Advertising costs are expensed as incurred. Approximately $0.7 million and $6.9
million of advertising costs were incurred in 1998 and 1999,respectively. No
such material amounts were incurred in 1997.
Income Taxes
The Company provides for income taxes utilizing the liability method. Under the
liability method, current income tax expense or benefit represents income taxes
expected to be payable or refundable for the current period. Deferred income tax
assets and liabilities are established for both the impact of differences
between the financial reporting bases and tax bases of assets and liabilities
and for the expected future tax benefit to be derived from tax credits and tax
loss carryforwards. Deferred income tax expense or benefit represents the change
during the reporting period in the net deferred income tax assets and
liabilities. Deferred tax assets are reduced by a valuation allowance when, in
the opinion of management, it is more likely than not that some portion or all
of the deferred tax assets will not be realized.
Net Loss Per Share
Basic earnings per share (EPS) is calculated by dividing the income or loss
available to common stockholders by the weighted average number of common shares
outstanding for the period without consideration for common stock equivalents.
Diluted EPS is computed by dividing the income or loss available to common
stockholders by the weighted average number of common shares outstanding for the
period in addition to the weighted average number of common stock equivalents
outstanding for the period. Shares subject to repurchase by the Company are
considered common stock equivalents for purposes of this calculation. Shares
issuable upon conversion of the Series A and Series B preferred stock, upon the
exercise of outstanding stock options and warrants and shares issued subject to
repurchase by the Company totaling 36,653,940 and 52,958,513, at December 31,
1997 and
F-9
<PAGE>
1998, respectively, have been excluded from the computation since their effect
would be antidilutive. Shares issuable upon conversion of the exercise of
outstanding stock options and warrants and shares issued subject to repurchase
by the Company totaling 6,897,060 at December 31, 1999 have been excluded from
the computation since their effect would be antidilutive.
Stock Options and Stock Purchase Warrants
Accounting Principles Board Opinion 25, "Accounting for Stock Issued to
Employees," is applied in accounting for all employee stock option and stock
purchase warrant arrangements. Compensation cost is recognized for all stock
options and stock purchase warrants granted to employees when the exercise price
is less than the market price of the underlying common stock on the date of
grant. Statement of Financial Accounting Standards No. 123 (SFAS No. 123),
"Accounting for Stock-Based Compensation" requires pro forma disclosures
regarding earnings (loss) as if compensation cost for stock options and stock
purchase warrants had been determined in accordance with the fair value based
method prescribed in SFAS No.123. Estimates of the fair market value are made
for each stock option and stock purchase warrant at the date of grant by the use
of the Black-Scholes option pricing model.
New Accounting Pronouncements
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 (SAB No.
101), "Revenue Recognition in Financial Statements." SAB 101 provides specific
guidance, among other things, as to the recognition of revenue related to up-
front non-refundable fees and services charges received in connection with a
contractual arrangement. The Company will adopt SAB No. 101 as required in 2000.
The Company is in the process of evaluating the impact on its consolidated
financial statements.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued. This statement establishes accounting and reporting
standards for derivative instruments and for hedging activities. The Company
will adopt SFAS No. 133 as required in 2001. The Company expects that adoption
will have no impact on the consolidated financial statements.
Reclassifications
Certain balances in the 1997 and 1998 financial statements have been
reclassified to conform to the 1999 presentation. The reclassifications had no
effect on financial condition, results of operations or cash flows.
2. SHORT-TERM INVESTMENTS
The Company's marketable debt securities are classified as held-to-maturity and
carried at amortized cost, which approximates fair value. Short-term investments
consist of the following:
--------------------------------------------------------------------
December 31,
------------------------
(In thousands) 1998 1999
--------------------------------------------------------------------
Short-term investments:
Commercial paper $ 33,170 $ 75,902
U.S. government securities 82,327 216,106
--------------------------------------------------------------------
$ 115,497 $ 292,008
--------------------------------------------------------------------
F-10
<PAGE>
3. COMPOSITION OF CERTAIN BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
December 31,
-------------------------
(In thousands) 1998 1999
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Accounts, loans, interest and other receivables, net:
Interest $ 2,135 $ 5,011
Trade, net of allowance for doubtful accounts of
$50 and $367 in 1998 and 1999, respectively 197 4,016
Other receivables from third parties - 1,701
Employee expense advances and loans 44 116
$ 2,376 $ 10,844
Equipment and furniture, net:
Operating equipment $ 9,633 $ 101,611
Office furniture 917 4,815
Leasehold improvements 668 3,199
Computer software 456 7,993
Computer equipment 274 17,239
Lab equipment 17 605
Accumulated depreciation (455) (10,631)
$ 11,510 $ 124,831
Collocation fees, net:
Collocation fees 13,889 59,860
Accumulated amortization (85) (2,439)
$ 13,804 $ 57,421
Accrued expenses and other current liabilities:
Accrued payroll $ 1,524 $ 8,851
Carrier services and other operating costs 991 8,492
Other 301 5,820
$ 2,816 $ 23,163
</TABLE>
4. DEBT
Outstanding debt consists of the following:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
December 31,
-------------------------
(In thousands) 1998 1999
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Note payable to bank; due in monthly installments of $28;
interest at prime plus 0.25% (8.0% and 8.75%,respectively);
collateralized by certain assets; matures April 2001 $ 805 $ 444
12 3/4% senior notes; due April 2009; unsecured - 325,000 (a)
13 1/2% senior discount notes; due May 2008; net of unamortized
discount of $109,304; unsecured 157,465 180,696 (b)
- -----------------------------------------------------------------------------------------
Total debt 158,270 506,140
Less current portion (333) (333)
- -----------------------------------------------------------------------------------------
$ 157,937 $ 505,807
- -----------------------------------------------------------------------------------------
</TABLE>
F-11
<PAGE>
(a) Cash proceeds from the issuance of the 1999 senior notes were approximately
$314.5 million of which approximately $113.2 million was used to purchase a
portfolio of U.S. government securities to secure payment of the first six
scheduled interest payments on the 1999 senior notes. These senior notes are
unsecured obligations of the Company and mature on April 15, 2009. The notes are
redeemable at the Company's option, in whole or in part, at any time after April
15, 2004, at predetermined redemption prices, together with any accrued and
unpaid interest through the date of redemption. Upon a change of control, each
holder of the senior notes may require the Company to purchase the notes at 101%
of the principal amount thereof, plus any accrued and unpaid interest to the
date of purchase. The 1999 senior notes contain restrictive covenants, including
limitations on future indebtedness, restricted payments, transactions with
affiliates, liens, sale of stock of subsidiaries, entering new lines of
business, dividends, mergers and transfers of assets.
(b) The sale of the 1998 senior discount notes included warrants to purchase
4,732,800 shares of common stock at an exercise price of $0.004 per share. The
notes were issued at a discount and cash proceeds from the issuance of the notes
and warrants were $150.4 million. The value ascribed to the warrants of $6.6
million resulted in additional debt discount. The debt issue costs are being
amortized to interest expense using the effective interest method over the
period that the notes are outstanding. The notes will accrete in value through
May 15, 2003, at a rate of 13 1/2% per annum, compounded semi-annually; no cash
interest will be payable prior to that date. Upon a change in control or upon
certain asset sales, the Company must offer to repurchase all or a portion of
the outstanding notes. In addition, the Company has the option to repurchase the
notes upon payment of a premium of accreted value at that point in time. The
notes contain restrictive covenants including limitations on future
indebtedness, restricted payments, transactions with affiliates, liens, sale of
stock of subsidiaries, dividends, mergers and transfers of assets.
Effective November 20, 1998, the Company completed an exchange offer of the 13
1/2% senior discount notes that allowed for registration of such notes under the
Securities Act of 1933, as amended. Of the original issue notes, $289.0 million
were tendered for exchange. The registered notes have substantially the same
terms and conditions as the unregistered notes, except that the registered notes
are not subject to the restrictions on resale or transfer that applied to the
unregistered notes.
Effective September 17, 1999, the Company completed an exchange offer of the 12
3/4% senior discount notes that allowed for registration of such notes under the
Securities Act of 1933, as amended. The original issue notes of $325.0 million
were tendered for exchange. The registered notes have substantially the same
terms and conditions as the unregistered notes, except that the registered notes
are not subject to the restrictions on resale or transfer that applied to the
unregistered notes.
Future maturities of outstanding debt are $0.3 million in 2000, $0.1 million in
2001, none in 2002, none in 2003, none in 2004, and $615.0 million thereafter.
5. STOCKHOLDERS' EQUITY
The Company was initially capitalized in February 1997 with common stock.
On July 3, 1997, the Company issued 12,280,000 shares of its Series A preferred
stock to new and existing investors for an aggregate purchase price of $12.3
million, which converted into 29,472,000 shares of common stock upon the closing
of the initial public offering of the Company's common stock as discussed below.
In addition, 210,000 shares of Series A preferred stock was sold to certain
investors for an aggregate purchase price of $0.2 million, which converted into
504,000 shares of common stock upon the closing of the initial public offering
of the Company's common stock as discussed below. The Company also issued
365,094 shares of Series A preferred stock at a purchase price of $0.80 per
share which converted into 876,226 shares of common stock upon the closing of
the initial public offering of the Company's common stock in April 1999 as
discussed below.
On March 12, 1998, the Company issued 4,044,943 shares of its Series B preferred
stock to new and existing investors at a price of $4.45 per share. The Company
received proceeds totaling $18.0 million, which converted into 9,707,863 shares
of common stock upon the closing of the initial public offering of the Company's
common stock in April 1999 as discussed below.
F-12
<PAGE>
In March 1999, the Company issued 3,731,410 shares of Series C preferred stock
to MCI WorldCom's investment fund for an aggregate purchase price of $30.0
million, which converted into 4,477,692 shares of common stock upon the closing
of the initial public offering of the Company's common stock in April 1999 as
discussed below. The terms of the transaction also provide for the Company and
MCI WorldCom to enter into various business relationships, including MCI
WorldCom's commitment to sell 100,000 of the Company's DSL lines over a period
of five years, subject to penalties for failure to reach target commitments.
This transaction included certain warrants as discussed in Note 6.
In March 1999, the Company issued 3,731,409 shares of Series C preferred stock
to Microsoft for an aggregate purchase price of $30.0 million, which converted
into 4,477,691 shares of common stock upon the closing of the initial public
offering of the Company's common stock in April 1999 as discussed below. The
terms of the transaction also provide for the Company and Microsoft to enter
into various business relationships. In connection with these business
relationships, the Company capitalized $10.0 million in business acquisition
costs that is being amortized to operating expense over a three-year period.
This transaction included certain warrants as discussed in Note 6.
In April 1999, the Company issued 932,836 shares of Series C preferred stock to
Qwest, which converted into 1,119,403 shares of common stock upon the closing of
the initial public offering of the Company's common stock in April 1999, as
discussed below. Also included was 441,176 shares of Series D preferred stock,
which converted into 441,176 shares of common stock upon the closing of the
initial public offering of the Company's common stock. The aggregate purchase
price for these transactions was $15.0 million. In accordance with provisions of
the agreement underlying this investment, the Company and Qwest have entered
into certain business relationships. In connection with this business
relationship, the Company capitalized $11.1 million in business acquisition
costs that is being amortized to operating expense over a five-year period. This
transaction included certain warrants as discussed in Note 6.
Effective April 12, 1999, the Company completed an initial public offering of
its common stock. A total of 10,781,250 common shares were issued at $21.00 per
share; net proceeds to the Company were approximately $210.1 million after
payment of underwriting fees and related issue costs. Upon completion of the
offering, all classes of preferred stock automatically converted to common
stock, resulting in an additional 51,076,051 shares of common stock being issued
leaving no shares of preferred stock issued and outstanding.
Effective August 17, 1999, the Company completed a secondary public offering of
its common stock in a transaction that allowed certain holders of warrants
issued in connection with the 13 1/2% senior discount notes to exercise those
warrants and sell the resulting common stock at $29.00 per share. A total of
3,961,862 shares were issued in the transaction; the company received no
proceeds from the sale of these shares. In connection with the secondary
offering, the underwriters of the offering were allowed to purchase 594,279
shares of common stock from the Company for $29.00 per share. The sale of these
shares was completed on September 14, 1999 and the Company received proceeds of
$16.4 million, net of underwriting discount.
Effective November 4, 1998, the Company completed a two-for-one split of its
common stock. Effective March 19, 1999, the Company completed a six-for-five
split of its common stock. The accompanying consolidated financial statements
have been restated for all periods presented to reflect the stock splits.
6. STOCK OPTIONS AND WARRANTS
The Company has established the 1999 Stock Incentive Plan (the 1999 Plan) as the
successor equity incentive program to the 1997 Option/Stock Issuance Plan (the
1997 Plan). The 1999 Plan provides for the grant of options to employees,
directors and outside consultants for purchase of up to an aggregate of
17,173,530 shares of
F-13
<PAGE>
common stock. All outstanding options under the 1997 Plan were incorporated into
the 1999 Plan, and no further options grants may be made under the 1997 Plan.
Options granted under the 1997 Plan are immediately exercisable and expire
within ten years after the date of grant. Shares acquired upon exercise are
subject to repurchase by the Company ratably over a four-year period from the
date of grant, at the option of the Company and at the exercise price. Options
granted under the 1999 Plan are exercisable ratably over a four-year period from
date of grant and expire within ten years of the date of the grant. The 1999
Plan provides for both incentive option and non-statutory option grants and for
accelerated vesting in the event of a 50% or more change in control of the
Company.
The 1999 Plan activity is as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
Weighted Weighted
Number of Average Average
Shares Fair Value Exercise Price
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Granted, below market 5,801,714 $ 0.29 $ 0.04
Exercised (320,458) 0.29 0.04
------------------------------------------------------------------------------------------------
Outstanding at December 31, 1997 5,481,256 $ 0.29 $ 0.04
Granted, below market 3,364,680 $ 2.62 $ 0.84
Exercised (5,560,308) 0.30 0.04
Canceled (136,348) 1.10 0.22
------------------------------------------------------------------------------------------------
Outstanding at December 31, 1998 3,149,280 $ 2.73 $ 0.89
Granted, at market 6,160,030 $ 31.58 $ 31.58
Granted, below market 2,081,298 6.36 12.54
Exercised (2,711,247) 3.11 1.23
Canceled (962,100) 19.23 13.65
------------------------------------------------------------------------------------------------
Outstanding at December 31, 1999 7,717,261 $ 26.87 $ 25.12
------------------------------------------------------------------------------------------------
</TABLE>
The following summarizes the outstanding and exercisable options under the 1999
Plan at December 31, 1999:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Number Remaining Exercise Number Exercise
Price Outstanding Life Price Exercisable Price
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.21 to $0.25 174,384 8.53 years $0.23 174,384 $0.23
$1.67 to $1.88 481,223 8.86 years $1.72 481,223 $1.72
$3.33 to $6.37 897,176 9.08 years $4.37 897,176 $4.37
$14.23 to $16.00 1,780,598 9.26 years $15.93 1,702,262 $15.98
$43.50 to $56.94 940,680 9.47 years $52.65 - -
$26.69 to $35.25 3,443,200 9.77 years $32.27 - -
--------------------------------------------------------------------------------------------------
</TABLE>
During 1997, 1998, and 1999, options were granted to employees at less than fair
value on the date of grant, resulting in $1.5 million, $4.9 million, and $11.4
million, respectively, of deferred compensation recorded as a reduction of
stockholders' equity. These amounts are being amortized as a charge to deferred
compensation
F-14
<PAGE>
expense over the vesting periods of the applicable options; such amortization
totaled $0.2 million, $0.7 million, and $3.7 million for the periods ended
December 31, 1997, 1998, and 1999, respectively.
An option to purchase 365,094 shares of Series A preferred stock at $0.80 per
share was granted to an employee during 1997. The Company recorded $73,000 in
compensation expense during 1997 related to this grant.
Had compensation expense for the Company's 1999 Plan and the preferred stock
option been determined based on the fair value method of accounting for stock-
based compensation, the Company's net loss and net loss per share for the
periods ended December 31, 1997, 1998, and 1999 would have been increased by
$11,000, $60,000, and $10.8 million and $0.01, $0.02, and $0.20 per share,
respectively. For purposes of determining this compensation expense, the fair
value of each option grant is estimated on the grant date using the Black-
Scholes option pricing model with the following weighted average assumptions
used for grants during the periods ended December 31, 1997, 1998, and 1999,
respectively: no dividend yield; risk-free interest rates of 5.3%, 4.9%, and
5.5%, respectively; expected volatility of nil for pre-initial public offering
grants; and 50% for post initial public offering grants and expected term of
four years for common options and six months for the preferred option.
The following summarizes the issued, outstanding, and exercised warrants at
December 31, 1999:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Number of
Original Number of Number of
Warrants Warrants Warrants Exercise Price Expiration
Issued Exercised Outstanding Per Share Date
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Warrants issued with 13 1/2% senior
discount notes 4,732,800 4,701,973 30,827 $ 0.004 May 2008
Warrants issued with Series C preferred stock 1,440,000 - 1,440,000 6.70 March 2004
Warrants issued with Series C preferred stock 136,996 136,996 21.00 April 2004
Warrants issued with Series D preferred stock 180,000 - 180,000 6.70 April 2004
May 1998 warrants issued with lease agreement 574,380 258,472 315,908 1.85 March 2009
March 1999 warrants issued with lease agreement 45,498 - 45,498 10.55 March 2009
April 1999 warrants issued with lease agreement 75,000 - 75,000 10.55 April 2002
July 1999 warrants issued with lease agreement 10,000 - 10,000 50.00 July 2004
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
In August 1999, after a "net exercise" of the warrants associated with the 13
1/2% senior discount notes, 3,961,862 of these shares were sold and an
additional 740,111 shares were sold by the selling stockholders in November
1999. The Company received no proceeds from these sales. The remaining warrants
have an expiration date of May 15, 2008. The warrants may be required to be
repurchased by the Company for cash upon the occurrence of a repurchase event,
such as a consolidation, merger, or sale of assets to another entity, as defined
in the provisions of the Warrant Agreement, at a price to be determined by an
independent financial expert selected by the Company. In the event a repurchase
event occurs, the difference between the repurchase price and the carrying value
of the warrants would be charged to equity.
During May 1998, the Company entered into a 36-month lease line that provides
for $24.5 million in equipment on an operating lease basis. In connection with
this lease agreement, the Company issued 574,380 warrants to purchase common
stock at a price of $1.85 per share, exercisable immediately. In March 1999, the
Company entered into additional 36-month lease lines for an aggregate of up to
$24.0 million in lease financing. In connection with these March 1999 leases,
the Company issued warrants to purchase an aggregate of 45,498 shares of common
stock at a price of $10.55 per share. These warrants are immediately
exercisable. In April 1999, the Company entered into an agreement for up to
$20.0 million in equipment lease financing and issued a warrant to purchase up
to 75,000 shares of common stock at an exercise price per share of $10.55. This
warrant is immediately exercisable. In July 1999, the Company entered into an
additional 36-month lease line for an aggregate of up to $26.0 million in lease
financing to be used for equipment. In connection with this July 1999
F-15
<PAGE>
lease, the Company issued a warrant to purchase 10,000 shares of common stock at
a price of $50.00 per share. This warrant is immediately exercisable.
7. INCOME TAXES
As of December 31, 1999, the Company had net operating loss carryforwards of
approximately $210.2 million, which are available to offset future taxable
income through 2019 for federal tax, a portion of which will be subject to the
limitations of Internal Revenue Code Section 382 relating to changes in
ownership of the Company. The deferred tax asset arising from the loss
carryforwards has been fully offset by a valuation allowance since the
utilization is uncertain. The valuation allowance increased by approximately
$1.0 million, $13.9 million, and $84.0 million during 1997, 1998, and 1999,
respectively, primarily as a result of the losses in each of these periods.
Components of deferred income taxes are as follows:
---------------------------------------------------------------------
(In thousands) 1998 1999
---------------------------------------------------------------------
Deferred tax assets:
Net operating loss carryforwards $ 14,724 $ 85,028
Original issue discount and other 178 13,885
---------------------------------------------------------------------
Gross deferred tax asset 14,902 98,913
Valuation allowance (14,902) (98,913)
---------------------------------------------------------------------
Net deferred income taxes $ - $ -
---------------------------------------------------------------------
The provision for (benefit from) income taxes reconciles to the statutory
federal tax rate as follows:
--------------------------------------------------------------------------
1997 1998 1999
--------------------------------------------------------------------------
Statutory federal tax rate (34.0%) (34.0%) (35.0%)
State income tax, net of federal benefit (5.4%) (5.4%) (5.3%)
Other (including non-deductible items) (1.8%) 0.9% 1.7%
Deferred tax asset valuation allowance 41.2% 38.5 38.6%
--------------------------------------------------------------------------
-% -% -%
--------------------------------------------------------------------------
8. RELATED PARTY TRANSACTIONS
The Company's in-house legal counsel is also a partner in a law firm used
externally by the Company. During 1998 and 1999, the Company incurred legal fees
and expenses of approximately $1.3 million and $2.4 million, respectively, to
the external firm in addition to the salary paid to the in-house counsel. At
December 31, 1999, the Company had a balance payable of approximately $0.7
million to this entity.
Two members of the Company's Board of Directors serve as directors to a company
that supplies equipment to the Company. The total purchases during 1998 and 1999
from the equipment supplier were approximately $13.0 million and $54.0 million,
respectively. At December 31, 1999, the Company had a balance payable of
approximately $0.4 million to this entity.
One member of the Company's Board of Directors serves as President of MCI
WorldCom Venture Fund and a Senior Vice President of MCI WorldCom. In March
1999, the Company entered into a strategic arrangement with MCI WorldCom. No
revenue was received from MCI WorldCom in 1999 under this arrangement.
F-16
<PAGE>
9. COMMITMENTS AND CONTINGENCIES
The Company leases office space and certain office equipment, telecommunications
equipment, network equipment and furniture under non-cancelable operating lease
agreements. The leases range in term from 24 months to 60 months and, in certain
instances, provide for options to extend. Rent expense under the operating
leases for 1997, 1998, and 1999 totaled $46,000, $2.0 million, and $21.0
million, respectively. Future minimum rental payments under the leases are $41.1
million in 2000, $40.6 million in 2001, $25.2 million in 2002, $3.5 million in
2003, $1.8 million in 2004, and $58,000 thereafter.
On February 18, 1999, the Company filed a complaint for declaratory relief in
San Diego County Superior Court, North County against Thomas R. Lafleur. Mr.
Lafleur is a former employee of the Company. After he left, he was sent a check
for the repurchase or buy-back of his unvested shares. Mr. Lafleur refused to
cash this check. The declaratory relief action is to determine that his shares
were unvested and thus properly repurchased. The Company has since amended its
complaint to allege additional causes of action, including fraud, breach of
contract, and interference with prospective economic advantage. On or about
March 26, 1999, Mr. Lafleur filed an answer to the complaint and also filed a
cross-complaint against the Company. The cross-complaint has been amended a
number of times and seeks compensatory and punitive damages. The Company intends
to defend vigorously against the claims asserted in the current cross-complaint.
The Company is currently accounting for these 438,115 shares as treasury stock.
The Company is aware of the filing of a legal action by i2 Technologies, Inc. in
the United States District Court in the Northern District of Texas on January 7,
2000, challenging its use of the name "Rhythms" on various grounds and alleging
that its use of that name infringes certain trademarks owned by i2 Technologies.
The Company denies that it infringes any legitimate trademark rights of i2
Technologies, in part on the grounds that the Company has priority in the
Rhythms name with respect to the goods and services provided by it and that its
use of those marks is not likely to cause confusion among the consumers of our
services and the services provided by i2 Technologies, respectively. The Company
intends to vigorously defend the continued use of its name in the manner in
which we have used it in the past and the Company's interests in the name
"Rhythms."
In addition, the Company is subject to state commission, Federal Communications
Commission and court decisions as they relate to the interpretation and
implementation of the 1996 Telecommunications Act, the interpretation of
competitive carrier interconnection agreements in general and our
interconnection agreements in particular. In some cases, the Company may be
deemed to be bound by the results of ongoing proceedings of these bodies. The
Company therefore, may participate in proceedings before these regulatory
agencies or judicial bodies that affect, and allow it to advance, its business
plans.
10. SUBSEQUENT EVENTS
In January 2000, the Company formed a joint venture with OCI to offer DSL-based
services in selected Canadian markets. The Company and OCI each received 100,000
shares of Class A voting stock. OCI also purchased 10,000,000 shares of Series A
preferred shares with a redemption amount of US $1.00 per share for $10.0
million. The Series A preferred shares have no voting or conversion rights, but
will earn dividends at a rate of six percent per annum payable only upon
redemption. To the extent the joint venture is unable to receive sufficient
financing through third parties, the Company and OCI shall be obligated to
provide additional capital contributions through installments.
In January and February 2000, the Company entered into an additional 36-month
lease line for an aggregate of up to $50.0 million in lease financing with GATX
Capital Corporation to be used for network equipment. In February 2000, the
Company entered into an additional 36-month lease line for $25.0 million in
lease financing with Cisco Systems Capital Corporation to be used for network
equipment.
F-17
<PAGE>
In February 2000, the Company issued $300.0 million aggregate principal amount
of 14% senior notes due 2010. Net proceeds of approximately $291.3 million were
raised. These senior notes are general unsecured obligations of the Company and
mature on February 15, 2010. The notes are redeemable at the Company's option,
in whole or in part, at any time after February 15, 2005, at predetermined
redemption prices, together with any accrued and unpaid interest through the
date of redemption. Upon a change of control, each holder of the senior notes
may require the Company to purchase the notes at 101% of the principal amount
thereof, plus any accrued and unpaid interest to the date of purchase. The 2000
senior notes contain restrictive covenants, including limitations on future
indebtedness, restricted payments, transactions with affiliates, liens, sale of
stock of subsidiaries, entering new lines of business, dividends, mergers and
transfer of assets.
In February and March 2000, the Company issued 3,000,000 shares of 6 3/4% Series
F cumulative convertible preferred stock in a private placement. Net proceeds
were approximately $291.0 million. Each share of Series F preferred stock is
convertible into 2.35 shares of common stock at any time at a conversion price
of $42.56 per share, subject to adjustment. Holders of Series F preferred stock
are entitled to dividends on a cumulative basis at an annual rate of 6 3/4%,
payable quarterly in cash. The preferred stock is redeemable at the Company's
option, in whole or in part, at any time after March 6, 2003, at predetermined
redemption prices, together with any accrued and unpaid dividends through the
date of redemption. Upon a change of control, each holder of the preferred
shares may require the Company to purchase any or all of the shares at 100% of
the liquidation preference, plus any accrued and unpaid dividends to the date of
purchase. The Series F preferred stock is subject to mandatory redemption on
March 3, 2012.
In March 2000, the Company sold $250.0 million of 8 1/4% Series E convertible
preferred stock to Hicks, Muse, Tate & Furst Inc. (Hicks Muse). Each share of
Series E preferred stock is convertible into shares of common stock at any time
at a conversion price of $37.50 per share, subject to adjustment. In addition,
the Company issued Hicks Muse warrants to purchase 1,875,000 shares of common
stock at an exercise price of $45.00 per share, exercisable for three years;
1,875,000 shares of common stock at an exercise price of $50.00 per share,
exercisable for five years; and 1,875,000 shares of common stock at an exercise
price of $55.00 per share, exercisable for seven years.
As part of the Hicks Muse agreement, holders of Series E preferred stock
affiliated with Hicks Muse have the right to appoint one representative to the
Company's Board of Directors provided that they continue to hold 40% of the
Series E preferred stock purchased by them or the underlying common stock or any
combination thereof. In addition, holders of the Company's Series E preferred
stock are be entitled to vote on all matters upon which the Company's common
stockholders can vote.
11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table sets forth certain unaudited consolidated statement of
income data for each of the Company's last eight quarters. This data has been
derived from unaudited consolidated financial statements that have been prepared
on the same basis as the annual audited consolidated financial statements and,
in the opinion of the Company, include all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of such
information. These unaudited quarterly results should be read in conjunction
with the consolidated financial statements and notes. The consolidated results
of operations for any quarter are not necessarily indicative of the results for
any future period.
F-18
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
(In thousands, except per share data) March 31 June 30 Sept. 30 Dec. 31
- ------------------------------------------------------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
1998:
Revenue $ 10 $ 71 $ 166 $ 281
Total costs and expenses $ 2,536 $ 5,147 $ 8,935 $12,311
Loss from operations $ (2,526) $ (5,076) $ (8,769) $ (12,030)
Net loss $ (2,380) $ (6,769) $(11,881) $ (15,304)
- ------------------------------------------------------------------------------------------------
Net loss per share (basic and diluted) $ (1.10) $ (2.84) $ (3.47) $ (0.68)
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
(In thousands, except per share data) March 31 June 30 Sept. 30 Dec. 31
- ------------------------------------------------------- ------------ ------------ -----------
1999:
Revenue $ 660 $ 1,641 $ 3,317 $ 5,471
Total costs and expenses $20,716 $37,370 $55,980 $86,188
Loss from operations $ (20,056) $ (35,729) $(52,663) $ (80,717)
Net loss $ (23,899) $ (42,857) $(61,778) $ (90,346)
- ------------------------------------------------------------------------------------------------
Net loss per share (basic and diluted) $ (5.38) $ (0.68) $ (0.89) $ (1.23)
- ------------------------------------------------------------------------------------------------
</TABLE>
F-19
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of
Rhythms NetConnections Inc.
Our audits of the consolidated financial statements referred to in our
report dated February 29, 2000, except for Note 10, as to which the date is
March 16, 2000 included in this Annual Report on Form 10-K also included an
audit of the financial statement schedule listed in the index in Item 14 of this
Form 10-K. In our opinion, this financial statement schedule presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
Denver, Colorado
February 29, 2000
<PAGE>
SCHEDULE II
Valuation and Qualifying Accounts
(in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
|
| Balance at Charged to Deduction/ Balance at end
| Beginning of Costs and Write-offs of Period
| Period Expenses
- -----------------------------------|------------------------------------------------------------------
Allowance for uncollectible trade |
receivables: |
Year ended December 31, 1997 | $ - $ - $ - $ -
Year ended December 31, 1998 | $ - $ 50 $ - $ 50
Year ended December 31, 1999 | $ 50 $ 325 $ (8) $ 367
|
</TABLE>
<PAGE>
Exhibit 3.4
CERTIFICATE OF DESIGNATIONS, PREFERENCES
AND RELATIVE, PARTICIPATING, OPTIONAL AND
OTHER SPECIAL RIGHTS OF PREFERRED
STOCK AND QUALIFICATIONS, LIMITATIONS
AND RESTRICTIONS THEREOF
OF
6 3/4% SERIES F CUMULATIVE CONVERTIBLE PREFERRED STOCK
OF
RHYTHMS NETCONECTIONS INC.
_______________
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
_______________
Rhythms NetConnections Inc. (the "Company"), a corporation organized and
existing under the General Corporation Law of the State of Delaware, does hereby
certify that pursuant to authority conferred upon the board of directors (the
"Board of Directors") by its Certificate of Incorporation, and pursuant to the
provisions of Section 151 of the General Corporation Law of the State of
Delaware, said Board of Directors is authorized to issue Preferred Stock of the
Company in one or more series and has adopted the resolution set forth below on
February [__], 2000 (the "Resolution"):
RESOLVED that, pursuant to the authority vested in the Board of Directors
by its Certificate of Incorporation, the Board of Directors does hereby
designate, create, authorize and provide for the issuance of 6 3/4% Series F
Cumulative Convertible Preferred Stock, par value $0.001 per share, with a
liquidation preference of $100.00 per share, consisting of 3,000,000 shares
having the designation, preferences, relative, participating, optional and other
special rights and the qualifications, limitations and restrictions thereof that
are set forth in the Certificate of Incorporation and in this Resolution as
follows:
1. Designation. There is hereby created out of the authorized and unissued
shares of Preferred Stock of the Company a series of Preferred Stock designated
as the "6 3/4% Series F Cumulative Convertible Preferred Stock" (the
"Convertible Preferred Stock"). The authorized number of shares constituting the
Convertible Preferred Stock shall be 3,000,000. The liquidation preference of
the Convertible Preferred Stock shall be $100.00 per share (the "Liquidation
Preference"). The date the Convertible Preferred Stock is first issued is
referred to as the "Issue Date".
<PAGE>
2. Rank. The Convertible Preferred Stock will, rank (i) junior in right
of payment to all existing and future debt obligations of the Company upon
liquidation, dissolution or winding up of the Company, including the Company's
13 1/2% Senior Discount Notes due 2008, the Company's 12 3/4% Senior Notes due
2009 and the Company's 14% Senior Notes due 2010 (collectively, the "Notes"),
(ii) junior in right of payment to each class or series of Capital Stock of the
Company, the terms of which expressly provide that such class or series of
Capital Stock will rank senior to the Convertible Preferred Stock as to
dividends and upon liquidation, dissolution or winding up of the Company
("Senior Capital Stock"); (iii) pari passu in right of payment with each class
of Capital Stock or series of Preferred Stock, established hereafter by the
Company's Board of Directors, the terms of which expressly provide that such
class or series will rank on a parity with the Convertible Preferred Stock as to
dividend rights and upon liquidation, dissolution or winding up of the Company
("Parity Capital Stock") and (iv) senior in right of payment as to dividend
rights and upon liquidation, dissolution or winding up of the Company to the
Common Stock and any Capital Stock of the Company that expressly provides that
it will rank junior to the Convertible Preferred Stock ("Junior Capital Stock").
The Company may not authorize, create (by way of reclassification or otherwise)
or issue any Senior Capital Stock or any obligation or security convertible or
exchangeable into, or evidencing a right to purchase, shares of any class or
series of Senior Capital Stock without the affirmative vote or consent of the
holders of at least 66-2/3% of the outstanding shares of Convertible Preferred
Stock.
3. Dividends. The Holders of shares of the Convertible Preferred Stock
will be entitled to receive, when, as and if dividends are declared by the Board
of Directors out of funds of the Company legally available therefor, cumulative
preferential dividends from the Issue Date of the Convertible Preferred Stock
accruing at the rate of $6 3/4 per share of Convertible Preferred Stock per
annum, or $1.6875 per share of Convertible Preferred Stock per quarter, payable
quarterly in arrears on March 3, June 3, September 3 and December 3 of each year
or, if any such date is not a Business Day, on the next succeeding business day
(each, a "Dividend Payment Date"), to the Holders of record as of the next
preceding February 17, May 17, August 17 and November 17 (each, a "Record
Date"). Accrued but unpaid dividends, if any, may be paid on such dates as
determined by the Board of Directors. Dividends payable on the Convertible
Preferred Stock will be computed on the basis of a 360-day year of twelve 30-day
months and will be deemed to accrue on a daily basis. Dividends on the
Convertible Preferred Stock will accrue from the Issue Date. Dividends on the
Convertible Preferred Stock will be paid in cash. The Convertible Preferred
Stock will not be redeemable unless all dividends accrued through such
redemption date shall have been paid in full. Notwithstanding anything to the
contrary herein contained, the Company shall not be required to declare or pay a
dividend if another person (including, without limitation, any of its
subsidiaries) pays an amount to the Holders equal to the amount of such dividend
on behalf of the Company and, in such event, the dividend will be deemed paid
for all purposes.
Dividends on the Convertible Preferred Stock will accrue whether or not the
Company has earnings or profits, whether or not there are funds legally
available for the
2
<PAGE>
payment of such dividends and whether or not dividends are declared. Dividends
will accumulate to the extent they are not paid on the Dividend Payment Date for
the quarter to which they relate. Accumulated unpaid dividends will accrue and
cumulate dividends at a rate of 6 3/4% per annum. The Company will take all
reasonable actions required or permitted under Delaware law to permit the
payment of dividends on the Convertible Preferred Stock.
No dividend whatsoever shall be declared or paid upon, or any sum set apart
for the payment of dividends upon, any outstanding share of the Convertible
Preferred Stock with respect to any dividend period unless all dividends for all
preceding dividend periods have been declared and paid upon, or declared and a
sufficient sum set apart for the payment of such dividend upon, all outstanding
shares of Convertible Preferred Stock. Unless full cumulative dividends on all
outstanding shares of Convertible Preferred Stock due for all past dividend
periods shall have been declared and paid, or declared and a sufficient sum for
the payment thereof set apart, then: (i) no dividend (other than, in the case of
Junior Capital Stock, a dividend payable solely in shares of Junior Capital
Stock or options, warrants or rights to purchase Junior Capital Stock, or in the
case of Parity Capital Stock, a dividend payable solely in shares of Junior
Capital Stock or Parity Capital Stock or options, warrants or rights to purchase
Junior Capital Stock or Parity Capital Stock) shall be declared or paid upon, or
any sum set apart for the payment of dividends upon, any shares of Parity
Capital Stock or Junior Capital Stock; (ii) no other distribution shall be
declared or made upon, or any sum set apart for the payment of any distribution
upon, any shares of Junior Capital Stock; (iii) no shares of Parity Capital
Stock or Junior Capital Stock or any warrants, rights, calls or options
exercisable for or convertible into any Parity Capital Stock or Junior Capital
Stock shall be purchased, redeemed or otherwise acquired or retired for value
(excluding an exchange for shares of other Parity Capital Stock or Junior
Capital Stock or a purchase, redemption or other acquisition from the proceeds
of a substantially concurrent sale of Parity Capital Stock or Junior Capital
Stock) by the Company or any of its subsidiaries; and (iv) no monies shall be
paid into or set apart or made available for a sinking or other like fund for
the purchase, redemption or other acquisition or retirement for value of any
shares of Parity Capital or Junior Capital Stock or any warrants, rights, calls
or options exercisable for or convertible into any Parity Capital Stock or
Junior Capital Stock by the Company or any of its subsidiaries. Holders of the
Convertible Preferred Stock shall not be entitled to any dividends, whether
payable in cash, property or stock, in excess of the full cumulative dividends
as herein described.
No full dividends may be declared or paid or funds set apart for the
payment of dividends on any Parity Capital Stock for any period unless full
cumulative dividends shall have been or contemporaneously are declared and paid
(or are deemed declared and paid) in full or declared and, if payable in cash, a
sum in cash sufficient for such payment is set apart for such payment on the
Convertible Preferred Stock. If full dividends are not so paid, the Convertible
Preferred Stock shall share dividends pro rata with the Parity Capital Stock.
Dividends on account of arrears and dividends in connection with any optional
redemption may be declared and paid at any time, without reference to any
3
<PAGE>
regular Dividend Payment Date, to holders of record on such date, not more than
45 days prior to the payment thereof, as may be fixed by the Board of Directors
of the Company.
4. Liquidation Rights. Upon any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Company after payment in full of
the outstanding debt obligations of the Company and the Liquidation Preference
(and any accrued and unpaid dividends) on any Senior Capital Stock, each Holder
of shares of the Convertible Preferred Stock shall be entitled to payment out of
the assets of the Company available for distribution of the Liquidation
Preference per share of the Convertible Preferred Stock held by such Holder,
plus an amount equal to the accrued and unpaid dividends on the Convertible
Preferred Stock and Additional Dividends (as defined in the Registration Rights
Agreement) (if any) to the date fixed for liquidation, dissolution or winding up
before any distribution is made on any Junior Capital Stock, including, without
limitation, Common Stock of the Company. After payment in full of the
Liquidation Preference and an amount equal to the accrued and unpaid dividends
and Additional Dividends (if any), to which Holders of Convertible Preferred
Stock are entitled, such Holders will not be entitled to any further
participation in any distribution of assets of the Company. However, neither the
voluntary sale, conveyance, exchange or transfer (for cash, shares of stock,
securities or other consideration) of all or substantially all of the property
or assets of the Company nor the consolidation or merger of the Company with or
into one or more corporations will be deemed to be a voluntary or involuntary
liquidation, dissolution or winding up of the Company, unless such sale,
conveyance, exchange, transfer, consolidation or merger shall be in connection
with a liquidation, dissolution or winding up of the affairs of the Company.
5. Redemption. (a) Mandatory Redemption. On March 3, 2012, the Company
shall redeem (subject to the legal availability of funds therefor) all
outstanding shares of Convertible Preferred Stock at a price in cash equal to
the Liquidation Preference thereof, together with an amount equal to accrued and
unpaid dividends on the Convertible Preferred Stock and Additional Dividends (if
any), to the date of redemption.
(b) Provisional Redemption. The Company may redeem the Convertible
Preferred Stock (a "Provisional Redemption"), in whole or in part, at any time
prior to March 6, 2003, upon notice as set forth in subsection (d), at a
redemption price equal to the Liquidation Preference thereof, together with an
amount equal to accrued and unpaid dividends on the Convertible Preferred Stock
and Additional Dividends (if any), to the date of redemption, if (i) the closing
price of the Common Stock shall have exceeded 150% of the Conversion Price then
in effect for at least 20 Trading Days in any consecutive 30-Trading Day period
ending on the Trading Day prior to the date of mailing of the notice of
redemption pursuant to subsection (d) (the "Notice Date") and (ii) the shelf
registration statement covering resales of the Convertible Preferred Stock and
the Common Stock issuable upon conversion of the Convertible Preferred Stock is
effective and available for use and is expected to remain effective and
available for use for the 30 days immediately following the Notice Date.
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Upon any such Provisional Redemption, the Company shall make an additional
payment in cash (the "Make-Whole Payment") with respect to the shares of
Convertible Preferred Stock called for redemption to holders on the Notice Date
in an amount equal to $13.79 per share of Convertible Preferred Stock, less the
amount of any dividends actually paid on such shares of Convertible Preferred
Stock prior to the Notice Date. The Company shall make the Make-Whole Payment on
all shares of Convertible Preferred Stock called for Provisional Redemption,
including any shares of Convertible Preferred Stock converted into Common Stock
pursuant to the terms hereof after the Notice Date and prior to the Provisional
Redemption Date.
(c) Optional Redemption. Except as set forth in Section 5(b), the
Convertible Preferred Stock may not be redeemed at the option of the Company
prior to March 6, 2003. The Convertible Preferred Stock may be redeemed, in
whole or in part, at the option of the Company after March 6, 2003, at the
redemption prices specified below (expressed as percentages of the Liquidation
Preference thereof), in each case, together with an amount equal to accrued and
unpaid dividends on the Convertible Preferred Stock and Additional Dividends (if
any), to the date of redemption, upon not less than 30 nor more than 60 days'
prior written notice, during the 12-month period commencing on March 6 of each
of the years set forth below:
Period Redemption Price
------ ----------------
2003....................................... 104.725%
2004....................................... 104.050%
2005....................................... 103.375%
2006....................................... 102.700%
2007....................................... 102.025%
2008....................................... 101.350%
2009....................................... 100.675%
2010 and thereafter........................ 100.000%
(d) General. On and after any date fixed for redemption (the
"Redemption Date"), provided that the Company has made available at the office
of the Transfer Agent a sufficient amount of cash to effect the redemption,
dividends will cease to accrue on the Convertible Preferred Stock called for
redemption (except that, in the case of a Redemption Date after a dividend
payment Record Date and prior to the related Dividend Payment Date, holders of
Convertible Preferred Stock on the dividend payment Record Date will be entitled
on such Dividend Payment Date to receive the dividend payable on such shares),
such shares shall no longer be deemed to be outstanding and all rights of the
holders of such shares as holders of Convertible Preferred Stock shall cease
except the right to receive the cash deliverable upon such redemption, without
interest from the Redemption Date.
In the event of a redemption of only a portion of the then outstanding
shares of Convertible Preferred Stock, the Company shall effect such redemption
on a pro rata basis, except that the Company may redeem all of the shares held
by Holders of fewer
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than 100 shares (or all of the shares held by Holders who would hold less than
100 shares as a result of such redemption), as may be determined by the Company.
With respect to a redemption pursuant hereto, the Company will send a
written notice of redemption by first class mail to each holder of record of
shares of Convertible Preferred Stock, not fewer than 30 days nor more than 60
days prior to the Redemption Date at its registered address (the "Redemption
Notice"); provided, however, that no failure to give such notice nor any
deficiency therein shall affect the validity of the procedure for the redemption
of any shares of Convertible Preferred Stock to be redeemed except as to the
holder or holders to whom the Company has failed to give said notice or except
as to the holder or holders whose notice was defective. The Redemption Notice
shall state:
(i) the redemption price;
(ii) whether all or less than all the outstanding shares of the
Convertible Preferred Stock are to be redeemed and the total number of shares of
the Convertible Preferred Stock being redeemed;
(iii) the Redemption Date;
(iv) that the holder is to surrender to the Company, in the manner, at
the place or places and at the price designated, his certificate or certificates
representing the shares of Convertible Preferred Stock to be redeemed; and
(v) that dividends on the shares of the Convertible Preferred Stock
to be redeemed shall cease to accumulate on such Redemption Date unless the
Company defaults in the payment of the redemption price.
Each holder of Convertible Preferred Stock shall surrender the certificate
or certificates representing such shares of Convertible Preferred Stock to the
Company, duly endorsed (or otherwise in proper form for transfer, as determined
by the Company), in the manner and at the place designated in the Redemption
Notice, and on the Redemption Date the full redemption price for such shares
shall be payable in cash to the person whose name appears on such certificate or
certificates as the owner thereof, and each surrendered certificate shall be
canceled and retired. In the event that less than all of the shares represented
by any such certificate are redeemed, a new certificate shall be issued
representing the unredeemed shares.
6. Voting Rights. Holders of record of shares of the Convertible
Preferred Stock will have no voting rights, except as required by law and as
provided in this Section 6 and in Sections 2, 9 and 13 hereof. Upon the
accumulation of accrued and unpaid dividends on the outstanding Convertible
Preferred Stock in an amount equal to six full quarterly dividends (whether or
not consecutive) (together with any event with a similar effect pursuant to the
terms of any other series of Preferred Stock upon which like
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rights have been conferred, a "Voting Rights Triggering Event"), the number of
members of the Company's Board of Directors will be immediately and
automatically increased by two (unless previously increased pursuant to the
terms of any other series of Preferred Stock upon which like rights have been
conferred), and the Holders of a majority of the outstanding shares of
Convertible Preferred Stock, voting together as a class (pro rata, based on
Liquidation Preference) with the holders of any other series of Preferred Stock
upon which like rights have been conferred and are exercisable, will be entitled
to elect two members to the Board of Directors of the Company. Voting rights
arising as a result of a Voting Rights Triggering Event will continue until such
time as all dividends in arrears on the Convertible Preferred Stock are paid in
full.
In the event such voting rights expire or are no longer exercisable because
dividends in arrears have been paid in full, the term of any directors elected
pursuant to the provisions of this paragraph 6 above shall terminate forthwith
and the number of directors constituting the Board of Directors shall be
immediately and automatically decreased by two (until the occurrence of any
subsequent Voting Rights Triggering Event). At any time after voting power to
elect directors shall have become vested and be continuing in the holders of
Convertible Preferred Stock (together with the holders of any other series of
Preferred Stock upon which like rights have been conferred and are exercisable)
pursuant to this paragraph 6, or if vacancies shall exist in the offices of
directors elected by such holders, a proper officer of the Company may, and upon
the written request of the holders of record of at least 25% of the shares of
Convertible Preferred Stock then outstanding or the holders of 25% of the shares
of any other series of Preferred Stock then outstanding upon which like rights
have been conferred and are exercisable addressed to the secretary of the
Company, shall, call a special meeting of the Holders of Convertible Preferred
Stock and the holders of such other series of Preferred Stock for the purpose of
electing the directors which such holders are entitled to elect pursuant to the
terms hereof; provided, however, that no such special meeting shall be called if
the next annual meeting of stockholders of the Company is to be held within 60
days after the voting power to elect directors shall have become vested (or such
vacancies arise, as the case may be), in which case such meeting shall be deemed
to have been called for such next annual meeting. If such meeting shall not be
called, pursuant to the provision of the immediately preceding sentence, by a
proper officer of the Company within 20 days after personal service to the
secretary of the Company at its principal executive offices, then the Holders of
record of at least 25% of the outstanding shares of Convertible Preferred Stock
or the holders of 25% of the shares of any other series of Preferred Stock upon
which like rights have been conferred and are exercisable may designate in
writing one of their members to call such meeting at the expense of the Company,
and such meeting may be called by the person so designated upon the notice
required for the annual meetings of stockholders of the Company and shall be
held at the place for holding the annual meetings of stockholders. Any Holder of
Convertible Preferred Stock or such other series of Preferred Stock so
designated shall have, and the Company shall provide, access to the lists of
Holders of Convertible Preferred Stock and the holders of such other series of
Preferred Stock for any such meeting of the holders thereof to be called
pursuant to the provisions hereof. If no special meeting of the Holders of
Convertible Preferred Stock and the
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holders of such other series of Preferred Stock is called as provided in this
paragraph 6, then such meeting shall be deemed to have been called for the next
meeting of stockholders of the Company.
At any meeting held for the purposes of electing directors at which the
Holders of Convertible Preferred Stock (together with the holders of any other
series of Preferred Stock upon which like rights have been conferred and are
exercisable) shall have the right, voting together as a separate class, to elect
directors as aforesaid, the presence in person or by proxy of the Holders of at
least a majority in voting power of the outstanding shares of Convertible
Preferred Stock (and such other series of Preferred Stock) shall be required to
constitute a quorum thereof.
Any vacancy occurring in the office of a director elected by the Holders of
Convertible Preferred Stock (and such other series of Preferred Stock) may be
filled by the remaining director elected by the Holders of Convertible Preferred
Stock (and such other series of Preferred Stock) unless and until such vacancy
shall be filled by the Holders of Convertible Preferred Stock (and such other
series of Preferred Stock).
Except as set forth above and otherwise required by applicable law, the
creation, authorization or issuance of any shares of any Junior Capital Stock,
Parity Capital Stock or Senior Capital Stock, or the increase or decrease in the
amount of authorized Capital Stock of any class, including Preferred Stock,
shall not require the affirmative vote or consent of Holders of Convertible
Preferred Stock and shall not be deemed to affect adversely the rights,
preferences, privileges or voting rights of shares of Convertible Preferred
Stock.
In any case in which the Holders of Convertible Preferred Stock shall be
entitled to vote pursuant hereto or pursuant to Delaware law, each Holder of
Convertible Preferred Stock entitled to vote with respect to such matters shall
be entitled to one vote for each share of Convertible Preferred Stock held.
Except as required by law, the Holders of the Convertible Preferred Stock
will not be entitled to vote on any merger or consolidation involving the
Company or a sale of all or substantially all the assets of the Company.
7. Change of Control
(a) In the event of a Change of Control, each Holder shall have the right
to require the Company to purchase all or a portion of such Holder's Convertible
Preferred Stock (the "Change of Control Offer") as of the date that is no
earlier than 30 days and no more than 60 days after the Change of Control Notice
Date (the "Change of Control Purchase Date") for a purchase price equal to 100%
of the Liquidation Preference together with accrued and unpaid dividends to but
not including the Change of Control Purchase Date. No funds shall be paid by the
Company pursuant to a Change of Control Offer prior to the Company's repurchase
of any securities ranking senior to the
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Convertible Preferred Stock and requiring repurchase pursuant to the change of
control provisions governing such senior securities.
Within 30 days after the occurrence of a Change of Control, the
Company shall mail to all Holders of record of the Convertible Preferred Stock a
written notice of the Change of Control, such date being the "Change of Control
Notice Date". The notice shall include the form of Change of Control Purchase
Notice (as defined) to be completed by the Holder and shall state:
(i) the date of such Change of Control and, briefly, the events
causing such Change of Control;
(ii) the date by which the Change of Control Purchase Notice pursuant
to this Section 7 must be given;
(iii) the Change of Control Purchase Date;
(iv) the Change of Control Purchase Price;
(v) briefly, the conversion rights of the Convertible Preferred
Stock;
(vi) the name and address of the Paying Agent and the Conversion
Agent;
(vii) the then current Conversion Rate;
(viii) that Convertible Preferred Stock as to which a Change of Control
Purchase Notice has been given may be converted into Common Stock only to the
extent that the Change of Control Purchase Notice has been withdrawn in
accordance with the terms of this Certificate of Designations;
(ix) the procedures that the Holder must follow to exercise rights
under this Section 7;
(x) the procedures for withdrawing a Change of Control Purchase
Notice, including a form of notice of withdrawal; and
(xi) that the Holder must satisfy the requirements set forth in the
Convertible Preferred Stock in order to convert the Convertible Preferred Stock.
(b) A Holder may exercise its rights specified in subsection (a) of this
Section 7 upon delivery of a written notice of the exercise of such rights (a
"Change of Control Purchase Notice") to the Paying Agent at any time prior to
the close of business on the Business Day next preceding the Change of Control
Purchase Date, stating:
(i) the name of the Holder;
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<PAGE>
(ii) the certificate numbers of the Convertible Preferred Stock that
the Holder will deliver to be purchased;
(iii) the number of shares of Convertible Preferred Stock that the
Holder will deliver to be purchased; and
(iv) that such Convertible Preferred Stock shall be purchased
pursuant to the terms and conditions specified in this Certificate of
Designations.
The delivery of such Convertible Preferred Stock to the Paying Agent
(together with all necessary endorsements) at the office of the Paying Agent
shall be a condition to the receipt by the Holder of the Change of Control
Purchase Price therefor; provided, however, that such Change of Control Purchase
Price shall be so paid pursuant to this Section 7 only if the Convertible
Preferred Stock so delivered to the Paying Agent shall conform in all respects
to the description thereof set forth in the related Change of Control Purchase
Notice.
Notwithstanding anything herein to the contrary, any Holder delivering to
the Paying Agent the Change of Control Purchase Notice shall have the right to
withdraw such Change of Control Purchase Notice at any time prior to the close
of business on the Business Day next preceding the Change of Control Purchase
Date by delivery of a written notice of withdrawal to the Paying Agent in
accordance with subsection (c) of this Section 7.
The Paying Agent shall promptly notify the Company of the receipt by it of
any Change of Control Purchase Notice or written withdrawal thereof.
(c) Upon receipt by the Paying Agent of the Change of Control Purchase
Notice specified in subsection (b) of this Section 7, the Holder of the
Convertible Preferred Stock in respect of which such Change of Control Purchase
Notice was given shall (unless such Change of Control Purchase Notice is
withdrawn as specified below) thereafter be entitled to receive solely the
Change of Control Purchase Price with respect to such Convertible Preferred
Stock. Such Change of Control Purchase Price shall be paid to such Holder
promptly following the later of (i) the Change of Control Purchase Date with
respect to such Convertible Preferred Stock (provided the conditions in
subsection (b) of this Section 7 have been satisfied) and (ii) the time of
delivery of such Convertible Preferred Stock to the Paying Agent by the Holder
thereof in the manner required by subsection (b) of this Section 7. Convertible
Preferred Stock in respect of which a Change of Control Purchase Notice has
been given by the Holder thereof may not be converted into shares of Common
Stock on or after the date of the delivery of such Change of Control Purchase
Notice unless such Change of Control Purchase Notice has first been validly
withdrawn.
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A Change of Control Purchase Notice may be withdrawn by means of a written
notice of withdrawal delivered by the Holder to the office of the Paying Agent
at any time prior to the close of business on the Business Day immediately
preceding the Change of Control Purchase Date, specifying:
(i) the name of the Holder;
(ii) the certificate numbers of the Convertible Preferred Stock in
respect of which such notice of withdrawal is being submitted;
(iii) the number of shares of Convertible Preferred Stock with respect
to which such notice of withdrawal is being submitted; and
(iv) the number of shares, if any, of such Convertible Preferred Stock
that remains subject to the original Change of Control Purchase Notice and that
has been or will be delivered for purchase by the Company.
(d) At or before 11:00 a.m., New York City time, on the second
Business Day immediately following a Change of Control Purchase Date, the
Company shall deposit with the Paying Agent an amount of money sufficient to pay
the aggregate Change of Control Purchase Price of all of the shares of
Convertible Preferred Stock that are to be purchased as of such Change of
Control Purchase Date plus accrued and unpaid dividends thereon up to but not
including the Change of Control Purchase Date. The manner in which the deposit
required by this subsection (d) is made by the Company shall be at the option of
the Company, provided that such deposit shall be made in a manner such that the
Paying Agent shall have immediately available funds on the second Business Day
immediately following the Change of Control Purchase Date.
If a Holder does not exercise the right to require the Company to purchase
such Holder's Convertible Preferred Stock, each share of such Convertible
Preferred Stock shall thereafter be convertible into the right to receive the
consideration receivable as a result of the Change of Control by a holder of the
number of shares of Common Stock into which such Convertible Preferred Stock was
convertible immediately prior to the Change of Control.
(e) A Change of Control shall be deemed to have occurred if any of
the following occurs: (a) any "person" or "group" (as such terms are used in
Sections 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")), excluding Permitted Holders, is or becomes the "beneficial
owner" (as defined in Rules 13d-3 or 13d-5 under the Exchange Act, except that a
person shall be deemed to have "beneficial ownership" of all securities that
such person has or acquires the right to acquire, whether such right is
exercisable immediately or only after the passage of time), directly or
indirectly, of more than 50% of the total voting power of all Voting Stock of
the Company (except that the person or group shall not be deemed the "beneficial
owner"
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of shares tendered pursuant to a tender or exchange offer made by that
person or group or any of their Affiliates until the tendered shares are
accepted for purchase or exchange) or has, directly or indirectly, the right to
elect or designate a majority of the Board of Directors of the Company or (b)
the Company consolidates with, or merges with or into, another person or sells,
assigns, conveys, transfers, leases or otherwise disposes of all or
substantially all of its assets to any person, or any person consolidates with,
or merges with or into, the Company, in any such event pursuant to a transaction
in which the outstanding Voting Stock of the Company is converted into or
exchanged for cash, securities or other property, other than any such
transaction where (i) the outstanding Voting Stock of the Company is converted
into or exchanged for (1) Voting Stock (other than Disqualified Stock) of the
surviving or transferee corporation or its parent corporation and/or (2) cash,
securities and other property in any amount which could be paid by the Company
as a Restricted Payment under the Indentures governing the Notes (the
"Indentures"), (ii) the "beneficial owners" (as so defined) of the Voting Stock
of the Company immediately before such transaction own, directly or indirectly,
immediately after such transaction, at least a majority of the voting power of
all Voting Stock of the surviving or transferee corporation or its parent
corporation immediately after such transaction, as applicable, or (iii)
immediately after such transaction, no "person" or "group" (as such terms are
defined above), excluding the Permitted Holders, is the "beneficial owner" (as
defined above), directly or indirectly, of more than 50% of the Voting Stock of
such surviving or transferee corporation or its parent corporation, as
applicable, or has, directly or indirectly, the right to elect or designate a
majority of the board of directors of the surviving or transferee corporation or
its parent corporation, as applicable, or (c) during any consecutive two-year
period, individuals who at the beginning of such period constituted the Board of
Directors of the Company (together with any new directors whose election by the
Board or whose nomination for election by the stockholders of the Company was
approved by a vote of a majority of the directors then still in office who were
either directors at the beginning of such period or whose election or nomination
for election was previously so approved) cease for any reason to constitute a
majority of the Board then in office. The good faith determination by the Board,
based upon advice of outside counsel, of the beneficial ownership of securities
of the Company within the meaning of Rules 13d-3 or 13d-5 under the Exchange Act
shall be conclusive, absent contrary controlling precedent or contrary written
interpretation published by the Commission. No inference shall be created that
officers or employees of the Company are acting as a "person" or "group" (as
such terms are used in Sections 13(d) or 14(d) of the Exchange Act) with the
power to designate a majority of the members of the Board solely because such
officers or employees constitute a majority of the members of the Board.
Notwithstanding the foregoing, a Change of Control will be deemed not to
have occurred if the last sale price of the Common Stock for any five Trading
Days immediately preceding the Change of Control is at least equal to 105% of
the Conversion Price in effect immediately preceding the Change of Control.
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8. Conversion Rates. The Convertible Preferred Stock will be convertible
at the option of the Holder, into shares of Common Stock at any time, unless
previously redeemed or repurchased, at a conversion rate of 2.35 shares of
Common Stock per share of the Convertible Preferred Stock) (as adjusted pursuant
to the provisions hereof, the "Conversion Rate") (or equivalent to a conversion
price of $42.56 per share of Common Stock, the "Conversion Price") (subject to
the adjustments described below). The right to convert a share of the
Convertible Preferred Stock called for redemption or delivered for repurchase
will terminate at the close of business on the Redemption Date for such
Convertible Preferred Stock or at the time of the repurchase, as the case may
be. Convertible Preferred Stock for which a Holder has delivered a Change of
Control Purchase Notice exercising the option of such Holder to require the
Company to purchase such Convertible Preferred Stock may be converted only if
such notice is withdrawn by a written notice of withdrawal delivered by the
Holder to the Paying Agent prior to the close of business on the Business Day
prior to the Change of Control Purchase Date in accordance with Section 7.
The right of conversion attaching to any share of Convertible Preferred
Stock may be exercised by the Holder thereof by delivering the share to be
converted to the office of the Transfer Agent, or any agency or office of the
Company maintained for that purpose, accompanied by a duly signed and completed
notice of conversion in form reasonably satisfactory to the Transfer Agent of
the Company, such as that which is set forth in Exhibit B hereto. The conversion
date will be the date on which the share and the duly signed and completed
notice of conversion are so delivered. As promptly as practicable on or after
the conversion date, the Company will issue and deliver to the Transfer Agent a
certificate or certificates for the number of full shares of Common Stock
issuable upon conversion, with any fractional shares rounded up to full shares
or, at the Company's option, payment in cash in lieu of any fraction of a share,
based on the Closing Price of the Common Stock on the Trading Day preceding the
conversion date. Such certificate or certificates will be delivered by the
Transfer Agent to the appropriate Holder on a book-entry basis or by mailing
certificates evidencing the additional shares to the Holders at their respective
addresses set forth in the register of Holders maintained by the Transfer Agent.
All shares of Common Stock issuable upon conversion of the Convertible Preferred
Stock will be fully paid and nonassessable and will rank pari passu with the
other shares of Common Stock outstanding from time to time. Any shares of
Convertible Preferred Stock surrendered for conversion during the period from
the close of business on any Record Date to the opening of business on the next
succeeding Dividend Payment Date must be accompanied by payment of an amount
equal to the dividends payable on such Dividend Payment Date on the shares of
Convertible Preferred Stock being surrendered for conversion. No other payment
or adjustment for dividends, or for any dividends in respect of shares of Common
Stock, will be made upon conversion. Except as otherwise provided herein,
dividends accrued shall not be paid on Convertible Preferred Stock converted. If
any Holder surrenders shares of Convertible Preferred Stock for conversion
between a Record Date and the related Dividend Payment Date, then
notwithstanding such conversion, the dividend payable on such Dividend Payment
Date will be paid to the Holder on such Record Date. Holders of Common Stock
issued upon
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conversion will not be entitled to receive any dividends payable to holders of
Common Stock as of any record time before the close of business on the
conversion date.
The Conversion Rate shall be adjusted from time to time by the Company as
follows:
(a) In case the Company shall (i) pay a dividend in shares of Common
Stock to all holders of Common Stock, (ii) make a distribution in shares of
Common Stock to all holders of Common Stock, (iii) subdivide its outstanding
Common Stock into a greater number of shares or (iv) combine its outstanding
Common Stock into a smaller number of shares, the Conversion Rate in effect
immediately prior thereto shall be adjusted so that the Holder of any Security
thereafter surrendered for conversion shall be entitled to receive that
number of shares of Common Stock which it would have owned had such Security
been converted immediately prior to the happening of such event. An adjustment
made pursuant to this subsection (a) shall become effective immediately after
the record date in the case of a dividend in shares or distribution and shall
become effective immediately after the effective date in the case of subdivision
or combination.
(b) In case the Company shall issue rights or warrants to all or
substantially all holders of its Common Stock entitling them to subscribe for or
purchase shares of Common Stock (or securities convertible into Common Stock) at
a price per share less than the current Market Price per share of Common Stock
at the record date for the determination of shareholders entitled to receive
such rights or warrants, the Conversion Rate in effect immediately prior thereto
shall be adjusted so that the same shall equal the rate determined by
multiplying the Conversion Rate in effect immediately prior to such record date
by a fraction, of which the denominator shall be the number of shares of Common
Stock outstanding on such record date, plus the number of shares which the
aggregate offering price of the total number of shares of Common Stock so
offered (or the aggregate conversion price of the convertible securities so
offered) would purchase at such current Market Price, and of which the numerator
shall be the number of shares of Common Stock outstanding on such record date
plus the number of additional shares of Common Stock offered (or into which
the convertible securities so offered are convertible). Such adjustment shall be
made successively whenever any such rights or warrants are issued, and shall
become effective immediately after such record date. If at the end of the period
during which such rights or warrants are exercisable not all rights or warrants
shall have been exercised, the adjusted Conversion Rate shall be immediately
readjusted to what it would have been based upon the number of additional shares
of Common Stock actually issued (or the number of shares of Common Stock
issuable upon conversion of convertible securities actually issued).
(c) In case the Company shall distribute to all or substantially all
holders of its Common Stock any shares of Capital Stock of the Company (other
than Common Stock), evidences of indebtedness or other non-cash assets
(including securities of any company other than the Company), or shall
distribute to all or substantially all holders of its Common Stock rights or
warrants to subscribe for or purchase any of its securities
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(excluding those referred to in subsection (b) above), then in each such case
the Conversion Rate shall be adjusted so that the same shall equal the rate
determined by multiplying the Conversion Rate in effect immediately prior to the
date of such distribution by a fraction, of which the denominator shall be the
current Market Price per share of the Common Stock on the record date mentioned
below less the fair market value on such record date (as determined by the Board
of Directors, whose determination shall be conclusive evidence of such fair
market value) of the portion of the Capital Stock, evidences of indebtedness or
other non-cash assets so distributed or of such rights or warrants applicable to
one share of Common Stock (determined on the basis of the number of shares of
Common Stock outstanding on the record date), and of which the numerator shall
be the current Market Price per share of the Common Stock on such record date.
Such adjustment shall become effective immediately after the record date for the
determination of shareholders entitled to receive such distribution.
Notwithstanding the foregoing, in the event that the Company shall distribute
rights or warrants (other than those referred to in subsection (b) above)
("Rights") pro rata to holders of Common Stock, the Company may, in lieu of
making any adjustment pursuant to this Section 8, make proper provision so that
each Holder of a share of Convertible Preferred Stock who converts such shares
of Convertible Preferred Stock (or any portion thereof) after the record date
for such distribution and prior to the expiration or redemption of the Rights
shall be entitled to receive upon such conversion, in addition to the shares of
Common Stock issuable upon such conversion (the "Conversion Shares"), a number
of Rights to be determined as follows: (i) if such conversion occurs on or prior
to the date for the distribution to the holders of Rights of separate
certificates evidencing such Rights (the "Distribution Date"), the same number
of Rights to which a holder of a number of shares of Common Stock equal to the
number of Conversion Shares is entitled at the time of such conversion in
accordance with the terms and provisions of and applicable to the Rights and
(ii) if such conversion occurs after the Distribution Date, the same number of
Rights to which a holder of the number of shares of Common Stock into which the
number of shares of Convertible Preferred Stock so converted was convertible
immediately prior to the Distribution Date would have been entitled on the
Distribution Date in accordance with the terms and provisions of and applicable
to the Rights.
(d) In case the Company shall, by dividend or otherwise, at any time
distribute (a "Triggering Distribution") to all or substantially all holders of
its Common Stock cash in an aggregate amount that, together with the aggregate
amount of all cash distributions to all or substantially all holders of its
Common Stock made within the 12 months preceding the date of payment of the
Triggering Distribution and in respect of which no Conversion Rate adjustment
pursuant to this Section 8 has been made, exceeds 10.0% of the product of the
current Market Price per share of Common Stock on the Business Day (the
"Determination Date") immediately preceding the day on which such Triggering
Distribution is declared by the Company multiplied by the number of shares of
Common Stock outstanding on such date (excluding shares held in the Treasury of
the Company), the Conversion Rate shall be increased so that the same shall
equal the rate determined by multiplying such Conversion Rate in effect
immediately prior to the Determination Date by a fraction, of which the
denominator shall be the current Market Price per share of the Common Stock on
the Determination Date less the amount of cash (plus the fair market value of
such other consideration) so distributed within such 12 months (including,
without limitation, the Triggering Distribution) applicable to one share of
Common Stock (determined on the basis of the number of shares of Common Stock
outstanding on the Determination Date) and the numerator shall be such current
Market Price per share of the
15
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Common Stock on the Determination Date, such reduction to become effective
immediately prior to the opening of business on the day following the date on
which the Triggering Distribution is paid.
(e) In case any transaction or event (including, without limitation, any
merger, consolidation, sale of assets, tender or exchange offer,
reclassification, compulsory share exchange or liquidation) shall occur in which
all or substantially all outstanding Common Stock is converted into or exchanged
for stock, other securities, cash or assets (each, a "Fundamental Change"), the
holder of each share of Convertible Preferred Stock outstanding immediately
prior to the occurrence of such Fundamental Change shall have the right upon any
subsequent conversion to receive (but only out of legally available funds, to
the extent required by applicable law) the kind and amount of stock, other
securities, cash and assets that such holder would have received if such share
had been converted immediately prior thereto.
(f) In any case in which this Section 8 shall require that an adjustment
be made following a record date or a Determination Date, as the case may be,
established for purposes of this Section 8, the Company may elect to defer (but
only until five Business Days following the filing by the Company with the
Transfer Agent of the certificate described in subsection (i) of this Section 8)
issuing to the Holder of any Security converted after such record date or
Determination Date the shares of Common Stock and other Capital Stock of the
Company issuable upon such conversion over and above the shares of Common Stock
and other Capital Stock of the Company issuable upon such conversion only on the
basis of the Conversion Rate prior to adjustment; and, in lieu of the shares the
issuance of which is so deferred, the Company shall issue or cause its transfer
agents to issue due bills or other appropriate evidence prepared by the Company
of the right to receive such shares. If any distribution in respect of which an
adjustment to the Conversion Rate is required to be made as of the record date,
effective date or Determination Date therefor is not thereafter made or paid by
the Company for any reason, the Conversion Rate shall be readjusted to the
Conversion Rate which would then be in effect if such record date had not been
fixed or such effective date or Determination Date had not occurred.
(g) (i) No adjustment in the Conversion Price or the corresponding
Conversion Rate shall be required unless such adjustment would require an
increase or decrease of at least 1% in such rate; provided, however, that any
adjustments which by reason of this paragraph are not required to be made shall
be carried forward and taken into account in any subsequent adjustment. All
calculations under this paragraph shall be made by the Company and shall be made
to the nearest cent or to the nearest one-hundredth of a share,
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<PAGE>
as the case may be. No adjustment need be made for a change in the par value or
no par value of the Common Stock.
(ii) No adjustment need be made for a transaction referred to in this
Section 8 if all holders of all of the Company's securities are entitled to
participate in the transaction on a basis and with notice that the Board of
Directors determines to be fair and appropriate in light of the basis and notice
on which holders of Common Stock participate in the transaction. The Company
shall give notice to the Transfer Agent of any such determination.
(iii) No adjustment need to be made for rights to purchase Common Stock
or issuances of Common Stock pursuant to a Company plan for reinvestment of
dividends of interest. No adjustment need be made for a change in the par value
or a change to no par value of the Common Stock. To the extent that the
Convertible Preferred Stock becomes convertible into the right to receive cash,
no adjustment need be made thereafter as to the cash. Interest will not accrue
on the cash.
(h) The Company shall be entitled to make such reductions in the
Conversion Rate, in additional to those required by Section 8, as it in its
discretion shall determine to be advisable in order that any stock dividends,
subdivisions of shares, distributions of rights to purchase stock or securities
or distributions of securities convertible into or exchangeable for stock
hereafter made by the Company to its shareholders shall not be taxable.
(i) The Company may from time to time reduce the Conversion Rate by an
amount for any period of time if the period is at least 20 days or such longer
period as required by law and if the reduction is irrevocable during the period;
provided, however, that in no event may the Conversion Rate be reduced such that
the Conversion Price is less than the par value of a share of Common Stock.
(j) Whenever the Conversion Rate is adjusted, the Company shall
promptly file with the Transfer Agent an Officers' Certificate briefly stating
the facts requiring the adjustment and the manner of computing it.
(k) The Company shall provide to the Holders reasonable notice of any
event that would result in an adjustment to the Conversion Rate so as to permit
the Holders to effect a conversion of Convertible Preferred Stock into shares of
Common Stock prior to the occurrence of such event.
9. Certain Covenants.
(a) Payments for Consent
Neither the Company nor any of its subsidiaries shall, directly or
indirectly, pay or cause to be paid any consideration, whether by way of
dividend or other distribution, fee
17
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or otherwise, to any Holder of shares of the Convertible Preferred Stock for or
as an inducement to any consent, waiver or amendment of any of the terms or
provisions of the Certificate of Designations or the Convertible Preferred Stock
unless such consideration is offered to be paid and is paid to all Holders of
the Convertible Preferred Stock that consent, waive or agree to amend in the
time frame set forth in the solicitation documents relating to such consent,
waiver or agreement.
(b) Reports
Whether or not required by the rules and regulations of the Commission, so
long as any shares of the Convertible Preferred Stock are outstanding, the
Company shall furnish to the Holders of the Convertible Preferred Stock (i) all
quarterly and annual financial information that would be required to be
contained in a filing with the Commission on Forms 10-Q and 10-K if the Company
were required to file such Forms, including "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and, with respect to
the annual information only, a report thereon by the Company's certified
independent accountants and (ii) all information that would be required to be
contained in a current report on Form 8-K if the Company were required to file
such reports. In the event the Company has filed any such report with the
Commission, it shall not be obligated to separately furnish the report to any
Holder unless and until such Holder requests a copy of the report. In addition,
whether or not required by the rules and regulations of the Commission, the
Company shall file a copy of all such information and reports with the
Commission for public availability (unless the Commission will not accept such a
filing) and make such information available to securities analysts and
prospective investors upon request.
10. Reissuance of Convertible Preferred Stock. Shares of Convertible
Preferred Stock redeemed for or converted into Common Stock or that have been
reacquired in any manner shall not be reissued as shares of Convertible
Preferred Stock and shall (upon compliance with any applicable provisions of the
laws of Delaware) have the status of authorized and unissued shares of Preferred
Stock undesignated as to series and may be redesignated and reissued as part of
any series of Preferred Stock; provided, however, that so long as any shares of
Convertible Preferred Stock are outstanding, any issuance of such shares must be
in compliance with the terms hereof.
11. Business Day. If any payment, redemption or exchange shall be
required by the terms hereof to be made on a day that is not a Business Day,
such payment, redemption or exchange shall be made on the immediately succeeding
Business Day.
12. Additional Rights of Holders. In addition to the rights provided to
Holders under this Certificate of Designation, Holders shall have the rights set
forth in the Registration Rights Agreement.
13. Amendment, Supplement and Waiver. The Company may amend this
Certificate of Designation with the affirmative vote or consent of the holders
of a
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majority of the shares of Convertible Preferred Stock then outstanding
(including votes or consents obtained in connection with a tender offer or
exchange offer for the Convertible Preferred Stock) and, except as otherwise
provided by applicable law, any past default or failure to comply with any
provision of this Certificate of Designation may also be waived with the consent
of such holders. Notwithstanding the foregoing, however, without the consent of
each Holder affected, an amendment or waiver may not (with respect to any shares
of the Convertible Preferred Stock held by a non-consenting Holder): (i) alter
the voting rights with respect to the Convertible Preferred Stock or reduce the
number of shares of the Convertible Preferred Stock whose Holders must consent
to an amendment, supplement or waiver, (ii) reduce the Liquidation Preference of
any share of the Convertible Preferred Stock or adversely alter the provisions
with respect to the redemption of the Convertible Preferred Stock, (iii) reduce
the rate of or change the time for payment of dividends on any share of the
Convertible Preferred Stock, (iv) waive a default in the payment of dividends or
Additional Dividends (if any) on the Convertible Preferred Stock, (v) make any
share of the Convertible Preferred Stock payable in money other than United
States dollars, (vi) make any change in the provisions of the Certificate of
Designation relating to waivers of the rights of Holders of the Convertible
Preferred Stock to receive the Liquidation Preference, dividends or Additional
Dividends (if any) on the Convertible Preferred Stock or (vii) make any change
in the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any Holder of the
Convertible Preferred Stock, the Company may (to the extent permitted by, and
subject to the requirements of, Delaware law) amend or supplement this
Certificate of Designation to cure any ambiguity, defect or inconsistency, to
provide for uncertificated shares of the Convertible Preferred Stock in addition
to or in place of certificated shares of the Convertible Preferred Stock, to
make any change that would provide any additional rights or benefits to the
Holders of the Convertible Preferred Stock or to make any change that the Board
of Directors determines, in good faith, is not materially adverse to Holders of
the Convertible Preferred Stock.
14. Transfer and Exchange. When Convertible Preferred Stock is presented
to the Transfer Agent with a request to register the transfer of such
Convertible Preferred Stock or to exchange such Convertible Preferred Stock for
an equal number of shares of Convertible Preferred Stock of other authorized
denominations, the Transfer Agent shall register the transfer or make the
exchange as requested if its reasonable requirements for such transaction are
met and such transfer or exchange is in compliance with applicable laws or
regulations.
15. Certain Definitions. As used in this Certificate of Designation, the
following terms shall have the following meanings (and (1) terms defined in the
singular have comparable meanings when used in the plural and vice versa, (2)
"including" means including without limitation, (3) "or" is not exclusive and
(4) an accounting term not otherwise defined has the meaning assigned to it in
accordance with United States generally accepted accounting principles as in
effect on the Issue Date and all accounting
19
<PAGE>
calculations will be determined in accordance with such principles), unless the
content otherwise requires:
"Additional Dividends" means, with respect to any share of Convertible
Preferred Stock, the additional amounts payable pursuant to Section 4 hereof.
"Affiliate" of any specified Person means (i) any other Person which,
directly or indirectly, controls, is controlled by or is under direct or
indirect common control with, the specified Person, (ii) any other Person that
owns, directly or indirectly, 10% or more of the specified Person's Voting Stock
or (iii) any executive officer or director of the specified Person.
"Board of Directors" mean the Board of Directors of the Company or any
committee thereof duty authorized to act on behalf of the Board.
"Business Day" means each day which is not a legal holiday.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations, rights in, or other equivalents (however designated
and whether voting and/or non-voting) of, such Person's capital stock, including
Preferred Stock, and any and all rights (other than any evidence of
indebtedness), warrants or options exchangeable for or convertible into such
capital stock.
"Closing Price" means on any day the reported last sale price on such day,
or in case no sale takes place on such day, the average of the reported closing
bid and ask prices on the principal national securities exchange (which shall
include the Nasdaq National Market) on which such stock is listed or admitted to
trading (and if the Common Stock is listed or admitted to trading on more than
one U.S. national or non-U.S. securities exchange, the Company shall determine,
in its reasonable discretion, the principal securities exchange on which such
Common Stock is listed or admitted to trading), or if not listed or admitted to
trading on any securities exchange, the average of the closing bid and ask
prices as furnished by any independent registered broker-dealer firm, selected
by the Company for that purpose, in each case adjusted for any stock split
during the relevant period.
"Commission" means the Securities and Exchange Commission.
"Default" means any event which is, or after notice or passage of time or
both would be, a Voting Rights Triggering Event.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
which, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any
event, matures or becomes mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or becomes exchangeable for indebtedness at the option
of the holder thereof, or becomes redeemable at the option
20
<PAGE>
of the holder thereof, in whole or in part, on or prior to the final maturity
date of any of the Notes; provided that any Capital Stock that would not
constitute Disqualified Stock but for provisions thereof giving holders thereof
the right to require such Person to repurchase or redeem such Capital Stock upon
the occurrence of an "asset sale" or "change of control" occurring prior to the
final maturity date of any of the Notes will not constitute Disqualified Stock
so long as the "asset sale" or "change of control" provisions applicable to such
Capital Stock are no more favorable to the holders thereof than those applicable
to the Notes and such Capital Stock specifically provides that such Person will
not repurchase or redeem any such stock pursuant to such provision prior to the
Company's repurchase of such Notes as are required to be repurchased pursuant to
the Indentures.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Holders" means the registered holders from time to time of the
Convertible Preferred Stock.
"Market Price", as of any date, means the average of the daily Closing
Price for the five consecutive trading days ending on such date.
"Officers' Certificate" means a certificate signed by two officers of the
Company.
"Permitted Holders" means Brentwood Venture Capital, Enterprise Partners,
Kleiner Perkins Caulfield & Byers, The Sprout Group and Catherine M. Hapka, and
their respective Affiliates.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
"Preferred Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated) of such
Person's preferred or preference stock, and including, without limitation, all
classes and series of preferred or preference stock of such Person.
"Registration Rights Agreement" means the Registration Rights Agreement
among the Company and Merrill Lynch, Pierce, Fenner and Smith Incorporated, and
Salomon Smith Barney Inc. with respect to the Convertible Preferred Stock.
"Securities Act" means the Securities Act of 1933, as amended.
"Shelf Registration Statement" means a shelf registration statement filed
with the Commission to cover resales of Transfer Restricted Securities by
holders thereof, as required by the Registration Rights Agreement.
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<PAGE>
"Trading Day" means, in respect of any securities exchange or
securities market, each Monday, Tuesday, Wednesday, Thursday and Friday, other
than any day on which securities are not traded on the applicable securities
exchange or in the applicable securities market.
"Transfer Agent" means the transfer agent for the Convertible
Preferred Stock appointed by the Company, which initially shall be American
Securities Transfer & Trust, Inc.
"Transfer Restricted Securities" means each share of Convertible
Preferred Stock (or the shares of Common Stock into which such share of
Convertible Preferred Stock is convertible) until (i) the date on which such
security has been effectively registered under the Securities Act and disposed
of in accordance with the Shelf Registration Statement or (ii) the date on which
such security is distributed to the public pursuant to Rule 144 under the
Securities Act or is saleable pursuant to Rule 144(k) under the Securities Act
(or any successor rule thereof) or would be saleable pursuant to Rule 144(k)
under the Securities Act had it not been held by, or had it never been held by,
an affiliate of the Company.
"Voting Stock" means, with respect to any Person, the Capital Stock of
any class or kind ordinarily having the power to vote for the election of
directors or other members of the governing body of such Person.
IN WITNESS WHEREOF, said Rhythms NetConnections Inc., has caused this
Certificate of Designation to be signed by Catherine M. Hapka, its Chairman and
Chief Executive Officer, this __th day of March, 2000.
RHYTHMS NETCONNECTIONS INC.
By: ______________________________
Name: Catherine M. Hapka
Title: Chairman and Chief
Executive Officer
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<PAGE>
Exhibit 3.5
RHYTHMS NETCONNECTIONS INC.
CERTIFICATE OF DESIGNATION OF THE POWERS,
PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL
AND OTHER SPECIAL RIGHTS OF 8.25% SERIES E
CONVERTIBLE PREFERRED STOCK AND
QUALIFICATIONS, LIMITATIONS
AND RESTRICTIONS THEREOF
8.25% Series E Convertible
Preferred Stock due 2015
Rhythms NetConnections Inc., a company organized and existing under the
General Corporation Law of the State of Delaware (the "Company"), certifies that
pursuant to the authority contained in its Certificate of Incorporation (the
"Certificate of Incorporation") and its By-laws (the "By-laws"), and in
accordance with Section 151 of the General Corporation Law of the State of
Delaware, the board of directors of the Company (the "Board of Directors") at a
meeting duly called and held on February __, 2000 duly approved and adopted the
following resolution, which resolution remains in full force and effect on the
date hereof:
RESOLVED, that pursuant to the authority vested in the Board of Directors
by the Certificate of Incorporation and By-laws, the Board of Directors does
hereby create, authorize and provide for the issue of a series of Preferred
Stock having the following designation, voting powers, preferences and relative,
participating, optional and other special rights:
Certain capitalized terms used herein are defined in Section 16.
1. Number and Designation. The Company shall have a series of Preferred
Stock, which shall be designated as its 8.25% Series E Convertible Preferred
Stock due 2015 (the "Series E Preferred Stock"), par value $0.001 per share. The
number of shares constituting the Series E Preferred Stock shall be 250,000.
Unless otherwise specified, references herein to any "Section" refer to the
Section number specified in this Certificate of Designation.
2. Issuance. The Company may issue up to 250,000 shares of Series E
Preferred Stock in accordance with the Purchase Agreement.
3. Registered Form; Liquidation Preference; Registrar. Certificates for
shares of Series E Preferred Stock shall be issuable only in registered form and
only with an initial liquidation preference of $1,000 per share plus accrued and
unpaid dividends. The Company shall serve as initial Registrar and Transfer
Agent (the "Registrar") for the Series E Preferred Stock.
4. Registration; Transfer. Shares of the Series E Preferred Stock have
not been registered under the Securities Act of 1933, as amended (the
"Securities Act") and may not be resold, pledged or otherwise transferred prior
to the date when they may be resold pursuant to Rule 144 under the Securities
Act other than (i) to the Company, (ii) pursuant to an exemption from
registration under the Securities Act or (iii) pursuant to an effective
registration statement under the Securities Act, in each case in accordance with
any applicable securities laws of any state of the United States. Until such
time as it is no longer required pursuant to the Securities
<PAGE>
Act, certificates evidencing the Series E Preferred Stock shall contain a legend
(the "Restricted Shares Legend") evidencing the foregoing restrictions in
substantially the form set forth on the form of Series E Preferred Stock
attached hereto as Exhibit A.
5. Paying Agent and Conversion Agent
---------------------------------
(a) The Company shall maintain (i) an office or agency where
shares of Series E Preferred Stock may be presented for payment (the
"Paying Agent"), (ii) an office or agency where shares of Series E
Preferred Stock may be presented for conversion (the "Conversion Agent"),
and (iii) a Registrar, which shall be an office or an agency where shares
of Series E Preferred Stock may be presented for transfer. The Company may
appoint the Registrar, the Paying Agent and the Conversion Agent and may
appoint one or more additional paying agents and one or more additional
conversion agents in such other locations as it shall determine. The term
"Paying Agent" includes any additional paying agent, and the term
"Conversion Agent" includes any additional conversion agent. The Company
may change any Paying Agent or Conversion Agent without prior notice to any
holder. The Company shall notify the Registrar of the name and address of
any Paying Agent or Conversion Agent appointed by the Company. If the
Company fails to appoint or maintain another entity as Paying Agent or
Conversion Agent, the Registrar shall act as such. Notwithstanding the
foregoing, the Company or any of its Affiliates may act as Paying Agent,
Registrar, coregistrar or Conversion Agent.
(b) Neither the Company nor the Registrar shall be required (A)
to issue, countersign or register the transfer of or exchange any share of
Series E Preferred Stock during a period beginning at the opening of
business 15 days before any Redemption Date (as defined under Section
10(d)) and ending at the close of business on such Redemption Date or (B)
to register the transfer of or exchange any share of Series E Preferred
Stock so selected for redemption.
(c) If shares of Series E Preferred Stock are issued upon the
transfer, exchange or replacement of shares of Series E Preferred Stock
bearing the Restricted Shares Legend, or if a request is made to remove
such Restricted Shares Legend on shares of Series E Preferred Stock, the
shares of Series E Preferred Stock so issued shall bear the Restricted
Shares Legend, or the Restricted Shares Legend shall not be removed, as the
case may be, unless the holders of such shares shall request such Legend be
removed, and outside counsel for such holders reasonably determines that
the transfer of such shares is no longer restricted by the Securities Act
and outside counsel for the Company reasonably concurs in such
determination.
(d) Each holder of a share of Series E Preferred Stock agrees to
indemnify the Company and the Registrar against any liability that may
result from the transfer, exchange or assignment by such holder of such
holder's share of Series E Preferred Stock in violation of any provision of
this Certificate of Designation and/or applicable Federal or state
securities law; provided, however, that such indemnity shall not apply to
acts of willful misconduct or gross negligence on the part of the Company
or the Registrar, as the case may be.
(e) Payments due on the shares of Series E Preferred Stock shall
be payable at the office or agency of the Paying Agent maintained for such
purpose in The City of New York and at any other office or agency
maintained by the Paying Agent for such purpose. If any such payment is in
cash, it shall be payable by United States dollar check drawn on, or wire
transfer
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<PAGE>
(provided that appropriate wire instructions have been received by the Paying
Agent at least 15 days prior to the applicable date of payment) to a United
States dollar account maintained by the holder with, a bank located in New York
City; provided that at the option of the Company payment of dividends in cash
may be made by check mailed to the address of the person entitled thereto as
such address shall appear in the Series E Preferred Share Register.
6. Dividend Rights.
---------------
(a) The holders of Series E Preferred Stock shall be entitled to
participating cumulative dividends, in preference to dividends on any Junior
Shares, which shall accrue as provided herein. Dividends on each share of Series
E Preferred Stock will accrue on a daily basis at the rate of 8.25% per annum of
the then effective Liquidation Preference of such share from and including the
Closing Date to the first to occur of (i) the date on which such share is
redeemed in accordance with Section 10, (ii) the date on which such share is
converted in accordance with Section 12 or (iii) the date the Company is
liquidated, dissolved or wound up in accordance with Section 9(c). Dividends
shall accrue as provided herein whether or not such dividends have been
declared, whether or not there are any unrestricted funds of the Company legally
available for the payment of dividends and whether or not such dividends are
then payable in cash as provided in Section 11. The Company will take all
actions required or permitted under the DGCL to permit the payment or accrual of
dividends on the Series E Preferred Stock. On each Dividend Payment Date,
commencing March 31, 2000, to and including the March 31, 2005 Dividend Payment
Date, accrued dividends on a share of the Series E Preferred Stock for the
preceding Dividend Period shall be added cumulatively to and thereafter remain a
part of the Liquidation Preference of such share. Thereafter, accrued dividends
shall be payable quarterly on each Dividend Payment Date, commencing on June 30,
2005, to the holders of record of the Series E Preferred Stock as of the close
of business on the applicable Dividend Record Date. Accrued dividends that are
not paid in full in cash on any such Dividend Payment Date (whether or not
declared and whether or not there are sufficient funds legally available for the
payment thereof) shall be added cumulatively to the Liquidation Preference on
the applicable Dividend Payment Date and thereafter remain a part thereof.
Accrued dividends added to the Liquidation Preference of a share of Series E
Preferred Stock in accordance with the foregoing provisions of this Section 6(a)
are sometimes referred to in this Certificate as "Accumulated Dividends". For
purposes of determining the amount of dividends "accrued" (i) as of the first
Dividend Payment Date and as of any date that is not a Dividend Payment Date,
such amount shall be calculated on the basis of the rate per annum specified
above in this paragraph for the actual number of days elapsed from and including
the Closing Date (in case of the first Dividend Payment Date and any date prior
to the first Dividend Payment Date) or the last preceding Dividend Payment Date
(in case of any other date) to the date as of which such determination is to be
made, based on a 360-day year, and (ii) as of any Dividend Payment Date after
the first Dividend Payment Date, such amount shall be calculated on the basis of
such rate per annum based on a 360-day year of twelve 30-day months.
(b) If a Change of Control occurs prior to March 31, 2005 (the
time and date such Change of Control occurs being the "Change of Control Date"),
an amount equal to the Special Dividend shall be added to the Liquidation
Preference of each share of the Series E Preferred Stock as of the Change of
Control Date and thereafter remain a part thereof.
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<PAGE>
In addition to all dividends provided for above, whenever the Company
shall declare or pay any dividend in cash on any Common Stock, the holders of
Series E Preferred Stock shall be entitled to receive such dividend on an as
converted basis. Dividends payable pursuant to this Section 6(c) shall not
reduce any dividends otherwise payable pursuant to Section 6(a) or 6(b).
7. Payment of Dividend; Mechanics of Payment; Dividend Rights Preserved.
--------------------------------------------------------------------
(a) Subject to Sections 6 and 11, dividends on any share of Series
E Preferred
Stock that are payable, and are punctually paid or duly provided for, on
any Dividend Payment Date shall be paid in cash to the person in whose name
such share of Series E Preferred Stock (or one or more predecessor shares
of Series E Preferred Stock) is registered at the close of business on the
next preceding March 15, June 15, September 15 and December 15 (each, a
"Dividend Record Date").
(b) Unless full cumulative dividends on all outstanding shares of
Series E Preferred Stock for all past Dividend Periods shall have been declared
and paid or declared and a sufficient sum for the payment thereof set apart (for
purposes of this Section 7, dividends on shares of Series E Preferred Stock that
are added to the Liquidation Preference of such shares through and including the
March 31, 2005 Dividend Payment Date shall be deemed declared and paid), then:
(i) no dividend (other than (A) with respect to Junior Shares, a
dividend payable solely in any Junior Shares, (B) with respect to Parity
Shares, a dividend payable solely in Junior Shares or Parity Shares or (C)
with respect to Parity Shares a partial dividend paid pro rata on such
Parity Shares and the shares of Series E Preferred Stock) shall be declared
or paid upon, or any sum set apart for the payment of dividends upon, any
Junior Shares or Parity Shares, respectively;
(ii) no other distribution shall be declared or made upon, or any
sum set apart for the payment of any distribution upon, any Junior Shares
or Parity Shares;
(iii) no Junior Shares or Parity Shares or any warrants, rights,
calls or options (other than any cashless exercises of options or buybacks
of options or restricted stock from present or former employees, directors
or consultants) exercisable for or convertible into any Parity Share or
Junior Share shall be purchased, redeemed or otherwise acquired (other than
in exchange for other Junior Shares or Parity Shares, respectively) by the
Company or any of its subsidiaries; and
(iv) no monies shall be paid into or set apart or made available
for a sinking or other like fund for the purchase, redemption or other
acquisition of any Junior Shares or Parity Shares or any warrants, rights,
calls or options exercisable for or convertible into any Parity Shares or
Junior Shares by the Company or any of its subsidiaries (other than any
cashless exercises of options or option buybacks).
Except as provided in Sections 6, 12 or 13, holders of Series E Preferred
Stock will not be entitled to any dividends, whether payable in cash, property
or stock, in excess of the full cumulative dividends as herein described.
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<PAGE>
(c) The Company will notify the Registrar and make a public
announcement no later than the close of business on the tenth Business Day
prior to the Record Date for each dividend as to whether it will pay such
dividend.
(d) Subject to the foregoing provisions of this Section 7, each
share of Series E Preferred Stock delivered under this Certificate of
Designation upon registration of transfer of or in exchange for or in lieu
of any other share of Series E Preferred Stock shall carry the rights to
dividends accumulated and unpaid, and to accrue, that were carried by such
other shares of Series E Preferred Stock.
(e) The holder of record of a share of Series E Preferred Stock
at the close of business on a Dividend Record Date with respect to the
payment of dividends on the shares of Series E Preferred Stock will be
entitled to receive such dividends with respect to such share of Series E
Preferred Stock on the corresponding Dividend Payment Date, notwithstanding
the conversion of such share after such Dividend Record Date and prior to
such Dividend Payment Date.
8. Voting Rights.
--------------
(a) The holders of record of shares of Series E Preferred Stock
shall not be entitled to any voting rights except as hereinafter provided in
this Section 8 or as otherwise provided by law.
(b) The holders of record of shares of Series E Preferred Stock
shall be entitled to vote on all matters that the holders of the Company's
Common Stock are entitled to vote upon.
(c) In addition to the voting rights set forth above, the
approval of the holders of at least a majority of the then Outstanding shares of
Series E Preferred Stock voting or consenting, as the case may be, as one class,
will be required for the Company to:
(i) amend the Certificate of Incorporation, this Certificate of
Designation or the By-Laws so as to (A) affect adversely the rights,
preferences (including, without limitation, liquidation preferences,
conversion price, dividend rate and Optional Redemption provisions),
privileges or voting rights of holders of the shares of Series E Preferred
Stock, or (B) increase or decrease the number of authorized shares of
Series E Preferred Stock;
(ii) in a single transaction or series of related transactions,
consolidate or merge with or into, or sell, assign, transfer, lease, convey
or otherwise dispose of all or substantially all of its assets to, any
person or adopt a plan of liquidation or dissolution, except as expressly
provided in Section 14;
(iii) enter into, or permit any of its subsidiaries to enter into,
any agreement that would impose material restrictions on the Company's
ability to honor the exercise of any rights of the holders of the Series E
Preferred Stock;
(iv) issue any shares of Series E Preferred Stock other than
pursuant to the terms of the Purchase Agreement as in effect on the Closing
Date; or
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(v) issue any class or series of equity of the Company that would be
deemed to be Parity Shares or Senior Shares with respect to rights relating
(a) to payments of dividends or (b) distribution of assets upon
liquidation, dissolution or winding-up.
(d) For so long as the members of the HMTF Group in the aggregate
own any combination of the shares of Series E Preferred Stock issued to members
of the HMTF Group on the Closing Date under the Purchase Agreement (the "HMTF
Issued Series E Preferred Shares") and shares of Common Stock issued upon
conversion of HMTF Issued Series E Preferred Shares that, taken together, would
represent (if all HMTF Issued Series E Preferred Shares were converted) an
amount of Common Stock issuable upon conversion of 40% or more of the HMTF
Issued Series E Preferred Shares, the HMTF Holders, voting as a single class,
shall be entitled to elect one director to serve on the Board of Directors at
any annual meeting of stockholders or special meeting held in place thereof, or
at a special meeting of the HMTF Holders called as hereinafter provided. At any
time after voting power to elect such director shall have become vested and be
continuing in the HMTF Holders pursuant to this paragraph, or if a vacancy shall
exist in the office of a director elected by the HMTF Holders at a time when the
HMTF Holders are entitled to elect a director pursuant to this paragraph, a
proper officer of the Company may, and upon the written request of the holders
of record of at least twenty-five percent (25%) of the HMTF Issued Series E
Preferred Shares then outstanding held by the HMTF Holders addressed to the
Secretary of the Company shall, call a special meeting of the HMTF Holders for
the sole purpose of electing the director that such holders are entitled to
elect. If such meeting shall not be called by a proper officer of the Company
within twenty (20) days after personal service of said written request upon the
Secretary of the Company, or within twenty (20) days after mailing the same
within the United States by certified mail, addressed to the Secretary of the
Company at its principal executive offices, then the holders of at least twenty-
five percent (25%) of the HMTF Issued Series E Preferred Shares then outstanding
held by the HMTF Holders may designate in writing one of their number to call
such meeting at the expense of the Company, and such meeting may be called by
the person so designated upon the notice required for the annual meeting of
stockholders of the Company and shall be held at the place for holding the
annual meetings of stockholders. As used herein, (i) "HMTF Group" means Hicks,
Muse, Tate & Furst Incorporated, a Texas corporation, and its Affiliates and
their respective officers, directors, partners, members, stockholders and
employees (and members of their respective families and trusts for the primary
benefit of such family members) and HM4 Rhythms Qualified Fund, LLC; HM4 Rhythms
Private Fund, LLC; HM PG-IV Rhythms, LLC; HM 4-SBS Rhythms Coinvestors, LLC; HM
4-EQ Rhythms Coinvestors LLC; and HMTF Bridge RHY, LLC and their respective
Affiliates and (ii) "HMTF Holders" means members of the HMTF Group that are
holders of all or a portion of the HMTF Issued Series E Preferred Shares or the
Common Stock into which such HMTF Issued Series E Preferred Shares are
converted. The action permitted or required to be taken by the HMTF Holders
pursuant to this Section 8(d) may be taken (1) at any annual or special meeting
of stockholders or at a special meeting of the HMTF Holders, or (2) without a
meeting, without prior notice, and without a vote if a consent or consents in
writing, setting forth the action so taken, shall be signed by the HMTF Holders
having not less than the minimum number of votes that would be necessary to
authorize or take such action at a meeting at which all shares held by the HMTF
Holders entitled to vote thereon were present and voted and shall be delivered
to the Company by delivery to its address listed in Section 8.2 of the Purchase
Agreement.
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(e) In exercising the voting rights set forth in Section 8(b),
each share of Series E Preferred Stock shall be entitled to vote on an as-
converted basis with the holders of the Company's Common Stock. Except as set
forth in Section 8(d), exercising the other voting rights set forth in this
Section 8, each share of Series E Preferred Stock entitled to vote shall have
one vote per share, except that when any other series of preferred stock shall
have the right to vote with the Series E Preferred Stock as a single class on
any matter, then the Series E Preferred Stock and such other series of preferred
stock shall have with respect to such matters one vote per $1,000 of the
aggregate liquidation preference of all shares of Series E Preferred Stock and
all shares of such other series of preferred stock. Except as otherwise required
by applicable law or as set forth herein, the shares of Series E Preferred Stock
shall not have any relative, participating, optional or other special voting
rights and powers and the consent of the holders thereof shall not be required
for the taking of any corporate action.
9. Ranking
-------
(a) The shares of Series E Preferred Stock will, with respect to
dividend rights and rights on liquidation, winding-up and dissolution, rank (i)
senior to all shares of Common Stock (whether issued in one or more classes) and
to each other class of capital stock or series of Preferred Stock of the Company
(including without limitation the Series 1 Junior Participating Preferred
Stock), the terms of which do not expressly provide that it ranks senior to or
on a parity with the shares of Series E Preferred Stock as to dividend rights
and rights on liquidation, winding-up and dissolution of the Company
(collectively referred to, together with all shares of Common Stock (whether
issued in one or more classes) of the Company, as "Junior Shares"); (ii) on a
parity with (A) the 6 3/4% Series F Cumulative Convertible Preferred Stock and
(B) each other class of capital stock or series of Preferred Stock of the
Company issued by the Company in compliance with Section 8, the terms of which
expressly provide that such class or series will rank on a parity with the
shares of Series E Preferred Stock as to dividend rights and rights on
liquidation, winding-up and dissolution of the Company (collectively referred to
as "Parity Shares"); and (iii) junior to each class of capital stock or series
of Preferred Stock of the Company, the terms of which expressly provide that
such class or series will rank senior to the shares of Series E Preferred Stock
as to dividend rights and rights upon liquidation, winding-up and dissolution of
the Company (collectively referred to as "Senior Shares").
(b) No dividend whatsoever shall be declared or paid upon, or any
sum set apart for the payment of dividends upon, any outstanding shares of
Series E Preferred Stock with respect to any dividend period unless all
dividends for all preceding dividend periods have been declared and paid, or
declared and a sufficient sum set apart for the payment of such dividends, or
declared and added to the Liquidation Value as described herein, upon all
outstanding Senior Shares.
(c) In the event of any liquidation, dissolution or winding-up of
the Company, whether voluntary or involuntary, the holders of the shares of
Series E Preferred Stock then Outstanding shall be entitled to receive, prior
and in preference to any distribution of any of the assets of the Company to the
holders of shares of Common Stock or Junior Shares by reason of their ownership
thereof, an amount equal to the greater of (i) the then effective Liquidation
Preference, plus an amount equal to all dividends accrued and unpaid thereon
from the last Dividend Payment Date to the date fixed for liquidation,
dissolution or winding-up or (ii) the amount such holders would receive if such
holders converted their shares of Series E Preferred
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Stock into Common Stock immediately prior to such liquidation, dissolution
or winding up. If upon the occurrence of such event the assets of the
Company shall be insufficient to permit the payment to such holders of the
full preferential amount and all liquidating payments on all Parity
Securities, the entire assets of the Company legally available for
distribution shall be distributed among the holders of the shares of Series
E Preferred Stock and the holders of all Parity Shares ratably in
accordance with the respective amounts that would be payable on such shares
of Series E Preferred Stock and any such Parity Securities if all amounts
payable thereon were paid in full. After payment of the full preferential
amount (and, if applicable, an amount equal to a pro rata dividend to the
holders of Outstanding shares of Series E Preferred Stock), such holders
shall not be entitled to any additional distribution of assets of the
Company.
10. Redemption
----------
(a) The shares of Series E Preferred Stock may be redeemed by the
Company at any time commencing on or after March 31, 2005 (or earlier, in
accordance with the provisions of Section 13(d) if a Change of Control Date
shall have occurred, but only as to shares of Series E Preferred Stock with
respect to which the Remarketing Option has been elected), in whole or from time
to time in part, at the election of the Company (an "Optional Redemption"), at a
redemption price (the "Redemption Price") payable in cash equal to 100% (or 101%
if a Change of Control shall have occurred prior to March 31, 2005) of the then
effective Liquidation Preference (after giving effect to the Special Dividend,
if applicable), plus accrued and unpaid dividends thereon from the last Dividend
Payment Date to the date of redemption (the "Optional Redemption Date").
(b) Shares of Series E Preferred Stock (if not earlier redeemed
or converted) shall be mandatorily redeemed by the Company on March 31, 2015
(the "Mandatory Redemption Date"); provided, however, that if such date is not a
Business Day, then the Mandatory Redemption Date shall be the next Business
Day), at a Redemption Price per share in cash equal to the then effective
Liquidation Preference (after giving effect to the Special Dividend, if
applicable), plus accrued and unpaid dividends thereon from the last Dividend
Payment Date to the Mandatory Redemption Date.
(c) In the event of a redemption of fewer than all the shares of
Series E Preferred Stock, the shares of Series E Preferred Stock will be chosen
for redemption by the Registrar from the Outstanding shares of Series E
Preferred Stock not previously called for redemption, pro rata or by lot or by
such other method as the Registrar shall deem fair and appropriate; provided,
that the Company may redeem (an "Odd-lot Redemption") all shares held by holders
of fewer than 100 shares of Series E Preferred Stock (or by holders that would
hold fewer than 100 shares of Series E Preferred Stock following such
redemption) prior to its redemption of other shares of Series E Preferred Stock;
provided, further, that the Company may not redeem a portion of any share
without redeeming the entire share. If fewer than all the shares of Series E
Preferred Stock represented by any share certificate are so to be redeemed, (i)
the Company shall issue a new certificate for the shares not redeemed and (ii)
if any shares represented thereby are converted before termination of the
conversion right with respect to such shares, such converted shares shall be
deemed (so far as may be) to be the shares represented by such share certificate
that was selected for redemption. Shares of Series E Preferred Stock that have
been converted during a
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selection of shares of Series E Preferred Stock to be
redeemed shall be treated by the Registrar as outstanding for the purpose
of such selection but not for the purpose of the payment of the Redemption
Price.
(d) In the event the Company elects to effect an Optional
Redemption, the Company shall (i) make a public announcement of the
redemption and (ii) give a redemption notice (the "Redemption Notice") to
the holders not fewer than 30 days nor more than 60 days before the
date (the "Redemption Date"). Whenever a Redemption Notice is
required to be delivered to the holders, such notice shall provide the
information set forth below and be given by first class mail, postage
prepaid to each holder of shares of Series E Preferred Stock to be
redeemed, at such holder's address appearing in the Series E Preferred
Register. All Redemption Notices shall identify the shares of Series
E Preferred Stock to be redeemed (including CUSIP number) and shall state:
(i) the Redemption Date;
(ii) the applicable Redemption Price;
(iii) if fewer than all the outstanding shares of Series E
Preferred Stock are to be redeemed, the identification (and,
in the case of partial redemption, the certificate number,
the total number of shares represented thereby and the number
of such shares being redeemed on the Redemption Date) of the
particular shares of Series E Preferred Stock to be redeemed;
(iv) that on the Redemption Date the Redemption Price, together
with all accrued and unpaid dividends from the last Dividend
Payment Date to the Redemption Date, will become due and
payable upon each such share of Series E Preferred Stock to
be redeemed and that dividends thereon will cease to accrue
on and after said date;
(v) the conversion price, the date on which the right to convert
shares of Series E Preferred Stock to be redeemed will
terminate and the place or places where such shares of Series
E Preferred Stock may be surrendered for conversion; and
(vi) the place or places where such shares of Series E Preferred
Stock are to be surrendered for payment of the Redemption Price and the
other amounts which are then payable.
The Redemption Notice shall be given by the Company or, at the Company's
request, by the Registrar in the name and at the expense of the Company;
provided that if the Company so requests, it shall provide the Registrar
adequate time, as reasonably determined by the Registrar, to deliver such
notices in a timely fashion.
(e) Prior to any Redemption Date, the Company shall deposit with
the Registrar or with a Paying Agent (or, if the Company is acting as its own
Paying Agent, segregate and hold in trust) an amount of consideration sufficient
to pay the Redemption Price of all the shares of Series E Preferred Stock that
are to be redeemed on that date plus all accrued and unpaid dividends thereon
from the last Dividend Payment Date to the Redemption Date. If any share of
Series E Preferred Stock called for redemption is converted, any consideration
deposited with the
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Registrar or with any Paying Agent or so
segregated and held in trust for the redemption of such share of Series E
Preferred Stock shall be paid or delivered to the Company upon Company
Order or, if then held by the Company, shall be discharged from such trust.
(f) Notice of redemption having been given as aforesaid, the
shares of Series E Preferred Stock so to be redeemed shall, on the Redemption
Date, become due and payable at the Redemption Price therein specified plus all
accrued and unpaid dividends thereon from the last Dividend Payment Date to the
Redemption Date, and from and after such date (unless the Company shall default
in the payment of the Redemption Price and accrued but unpaid dividends)
dividends on such shares of Series E Preferred Stock shall cease to accrue and
such shares shall cease to be convertible into shares of Common Stock. Upon
surrender of any such shares of Series E Preferred Stock for redemption in
accordance with said notice, such shares of Series E Preferred Stock shall be
redeemed by the Company at the applicable Redemption Price, together with all
accrued and unpaid dividends thereon from the last Dividend Payment Date to the
Redemption Date. If any share of Series E Preferred Stock called for redemption
shall not be so paid upon surrender thereof for redemption, the Redemption Price
thereof, and all accrued and unpaid dividends thereon from the last Dividend
Payment Date to the Redemption Date, shall, until paid, bear interest from the
Redemption Date at the dividend rate payable on the shares of Series E Preferred
Stock and such shares shall remain convertible.
(g) Any certificate that represents more than one share of Series
E Preferred Stock and is to be redeemed only in part shall be surrendered at any
office agency of the Company designated for that purpose (with, if the Company
or the Registrar so requires, due endorsement by, or a written instrument of
transfer in form satisfactory to the Company and the Registrar duly executed by,
the holder thereof or his attorney duly authorized in writing), and the Company
shall execute, and the Registrar shall countersign and deliver to the holder of
such share of Series E Preferred Stock without service charge, a new Series E
Preferred Stock certificate or certificates, representing any number of shares
of Series E Preferred Stock as requested by such holder, in aggregate amount
equal to and in exchange for the number of shares not redeemed and represented
by the Series E Preferred Stock certificate so surrendered.
(h) If a share of Series E Preferred Stock is redeemed subsequent
to a Dividend Record Date with respect to any Dividend Payment Date and on or
prior to such Dividend Payment Date, then the accrued dividends payable on such
Dividend Payment Date will be paid to the person in whose name such share of
Series E Preferred Stock is registered at the close of business on such Dividend
Record Date.
11. Method of Payments
------------------
The Company may make any dividend payments in cash with respect to any
Dividend Period beginning after March 31, 2005; provided that no payment shall
be made in cash that would violate the provisions of the Indenture dated as of
May 5, 1998 between the Company and State Street Bank and Trust Company of
California, N.A. or the Indenture dated April 23, 1999 between the same parties,
if and to the extent those Indentures are in effect. Any dividends not paid in
cash on a current basis on the applicable Dividend Payment Date with respect to
all periods after March 31, 2005, and all dividends with respect to periods
prior to March 31, 2005, shall not be paid in cash but rather shall constitute
Accumulated Dividends as dividends. No payment may be made in respect of
Accumulated Dividends as dividends. Rather, Accumulated
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Dividends shall be added to the Liquidation Preference. Dividends may not be
paid by delivery of shares of Series E Preferred Stock.
12. Conversion
----------
(a) Subject to and upon compliance with the provisions of this
Certificate of Designation, at the option of the holder thereof, any share of
Series E Preferred Stock may be converted at any time into a number of fully
paid and nonassessable shares of Common Stock (calculated as to each conversion
to the nearest 1/100 of a share) equal to (i) the then effective Liquidation
Preference thereof plus accrued and unpaid dividends to the date of conversion
divided by (ii) the Conversion Price in effect at the time of conversion. Such
conversion right shall expire at the close of business on the Business Day next
preceding the Mandatory Redemption Date. In case a share of Series E Preferred
Stock is called for redemption, such conversion right in respect of the share so
called shall expire at the close of business on the Business Day next preceding
the Redemption Date, unless the Company defaults in making the payment due upon
redemption.
The Conversion Price shall be initially $37.50 per share of Common Stock.
The Conversion Price shall be adjusted in certain instances as provided in
Section 12(d) and Section 12(e).
(b) In order to exercise the conversion privilege, the holder of
any share of Series E Preferred Stock to be converted shall surrender the
certificate for such share, duly endorsed or assigned to the Company or in
blank, at any office or agency of the Company maintained for that purpose,
accompanied by written notice to the Company at such office or agency that the
holder elects to convert such share or, if fewer than all the shares of Series E
Preferred Stock represented by a single share certificate are to be converted,
the number of shares represented thereby to be converted.
Shares of Series E Preferred Stock shall be deemed to have been converted
immediately prior to the close of business on the day of surrender of such
shares for conversion in accordance with the foregoing provisions, and at such
time the rights of the holders of such shares as holders shall cease, and the
person or persons entitled to receive the shares of Common Stock issuable upon
conversion shall be treated for all purposes as the record holder or holders of
such shares of Common Stock at such time. As promptly as practicable on or
after the conversion date, the Company shall issue and shall deliver at such
office or agency a certificate or certificates for the number of full shares of
Common Stock issuable upon conversion, together with payment in lieu of any
fraction of a share, as provided in Section 12(c).
In the case of any conversion of fewer than all the shares of Series E
Preferred Stock evidenced by a certificate, upon such conversion the Company
shall execute and the Registrar shall countersign and deliver to the holder
thereof, at the expense of the Company, a new certificate or certificates
representing the number of unconverted shares of Series E Preferred Stock.
(c) No fractional shares of Common Stock shall be issued upon the
conversion of a share of Series E Preferred Stock. If more than one share of
Series E Preferred Stock shall be
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surrendered for conversion at one time by the same holder, the number of full
shares of Common Stock which shall be issuable upon conversion thereof shall be
computed on the basis of the aggregate number of shares of Series E Preferred
Stock so surrendered. Instead of any fractional shares of Common Stock which
would otherwise be issuable upon conversion of any share of Series E Preferred
Stock, the Company shall pay a cash adjustment in respect of such fraction in an
amount equal to the same fraction of the Closing Price (as defined in Section
12(d)(vi) per Common Share at the close of business on the Business Day prior to
the day of conversion.
(d) The Conversion Price shall be adjusted from time to time by
the Company as follows:
(i) If the Company shall hereafter pay a dividend or make a
distribution to all holders of the outstanding shares of Common Stock in
shares of Common Stock, the Conversion Price in effect at the opening of
business on the date following the date fixed for the determination of
shareholders entitled to receive such dividend or other distribution shall
be reduced by multiplying such Conversion Price by a fraction of which the
numerator shall be the number of shares of Common Stock outstanding at the
close of business on the Common Stock Record Date (as defined in Section
12(d)(vi)) fixed for such determination and the denominator shall be the
sum of such number of shares and the total number of shares constituting
such dividend or other distribution, such reduction to become effective
immediately after the opening of business on the day following the Common
Stock Record Date. If any dividend or distribution of the type described in
this Section 12(d)(i) is declared but not so paid or made, the Conversion
Price shall again be adjusted to the Conversion Price which would then be
in effect if such dividend or distribution had not been declared.
(ii) (a) In case the Company shall issue or sell any Common Stock
in a financing conducted as an underwritten public offering or a private
placement (in each case for cash and other than transactions with strategic
investors) for a consideration per share that is 90% or less than the
Current Market Price on the date of such issuance, or shall issue
securities convertible into Common Stock having a conversion price per
share that is 90% or less than the Current Market Price at the date of
issuance of such convertible security, the Conversion Price to be in effect
after such issuance or sale shall be determined by multiplying the
Conversion Price in effect immediately prior to such issuance or sale by a
fraction, (1) the numerator of which shall be the sum of (x) the number of
shares of Common Stock outstanding immediately prior to such issuance or
sale and (y) the number of shares of Common Stock which the aggregate
consideration receivable by the Company for the total number of additional
shares of Common Stock so issued or sold (or issuable on conversion) would
purchase at the Current Market Price in effect immediately prior to such
issuance or sale and (2) the denominator of which shall be the sum of the
number of shares of Common Stock outstanding immediately prior to such
issuance or sale and the number of additional shares of Common Stock to be
issued or sold (or, in the case of convertible securities, issued on
conversion). Notwithstanding the foregoing, the Conversion Price shall not
be adjusted as a result of the circumstances described in this Section
12(d)(ii)(a) if the HMTF Holders shall be offered the opportunity to
purchase their pro rata portion (based on the percentage of the outstanding
shares of Common Stock represented by the Series E Preferred Stock then
held by the
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HMTF Holders on an as-converted basis) of such offering. The preemptive right
set forth in the preceding sentence shall be deemed waived as to an HMTF Holder
if such HMTF Holder does not respond in a timely fashion to notice of the
pricing of an offering to which the preemptive right would otherwise apply.
(b) If the Company shall offer or issue rights or warrants to all
holders of its outstanding shares of Common Stock entitling them to
subscribe for or purchase shares of Common Stock at a price per share less
than the Current Market Price (as defined in Section 12(d)(vi)) on the
Common Stock Record Date fixed for the determination of shareholders
entitled to receive such rights or warrants, the Conversion Price shall be
adjusted so that the same shall equal the price determined by multiplying
the Conversion Price in effect at the opening of business on the date after
such Common Stock Record Date by a fraction of which the numerator shall be
the number of shares of Common Stock outstanding at the close of business
on the Common Stock Record Date plus the number of shares of Common Stock
the aggregate offering price of the total number of shares of Common
Stock subject to such rights or warrants would purchase at such Current
Market Price and of which the denominator shall be the number of shares of
Common Stock outstanding at the close of business on the Common Stock
Record Date plus the total number of additional shares of Common Stock
subject to such rights or warrants for subscription or purchase. Such
adjustment shall become effective immediately after the opening of business
on the day following the Common Stock Record Date fixed for determination
of shareholders entitled to purchase or receive such rights or warrants.
To the extent that shares of Common Stock are not delivered pursuant to
such rights or warrants, upon the expiration or termination of such rights
or warrants the Conversion Price shall again be adjusted to be the
Conversion Price which would then be in effect had the adjustments made
upon the issuance of such rights or warrants been made on the basis of
delivery of only the number of shares of Common Stock actually delivered.
If such rights or warrants are not so issued, the Conversion Price shall
again be adjusted to be the Conversion Price which would then be in effect
if such date fixed for the determination of shareholders entitled to
receive such rights or warrants had not been fixed. In determining whether
any rights or warrants entitle the holders to subscribe for or purchase
shares of Common Stock at less than such Current Market Price, and in
determining the aggregate offering price of such shares of Common Stock,
there shall be taken into account (x) any consideration received for such
rights or warrants, with the value of such consideration and the amount of
such exercise or subscription price, if other than cash, to be determined
by the Board of Directors and (y) the amount of any exercise price or
subscription price required to be paid upon exercise of such warrants or
rights.
(iii) If the outstanding shares of Common Stock shall be
subdivided into a greater number of shares of Common Stock, the Conversion Price
in effect at the opening of business on the day following the day upon which
such subdivision becomes effective shall be proportionately reduced, and,
conversely, if the outstanding shares of Common Stock shall be combined into a
smaller number of shares of Common Stock, the Conversion Price in effect at the
opening of business on the day following the day upon which such combination
becomes effective shall be proportionately increased, such reduction or
increase, as the case may be, to become effective immediately after
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<PAGE>
the opening of business on the day following the day upon which such
subdivision or combination becomes effective.
(iv) If the Company shall, by dividend or otherwise, distribute to
all holders of its shares of Common Stock any class of capital stock of the
Company (other than any dividends or distributions to which Section
12(d)(i) applies) or evidences of its indebtedness, cash or other assets
(including securities, but excluding any rights or warrants of a type
referred to in Section 12(d)(ii)(b) and dividends and distributions paid
exclusively in cash and excluding any capital stock, evidences of
indebtedness, cash or assets distributed upon a merger or consolidation to
which Section 12(e) applies) (the foregoing hereinafter in this Section
12(d)(iv) called the "Distributed Securities"), then, in each such case,
the Conversion Price shall be reduced so that the same shall be equal to
the price determined by multiplying the Conversion Price in effect
immediately prior to the close of business on the Common Stock Record Date
(as defined in Section 12(d)(vi) with respect to such distribution by a
fraction of which the numerator shall be the Current Market Price
(determined as provided in Section 12(d)(vi) on such date less the fair
market value (as determined by the Board of Directors, whose good faith
determination shall be conclusive and described in a resolution of the
Board of Directors) on such date of the portion of the Distributed
Securities so distributed applicable to one share of Common Stock and the
denominator shall be such Current Market Price, such reduction to become
effective immediately prior to the opening of business on the day following
the Common Stock Record Date; provided, however, that, in the event the
then fair market value (as so determined) of the portion of the Distributed
Securities so distributed applicable to one share of Common Stock is equal
to or greater than the Current Market Price on the Common Stock Record
Date, in lieu of the foregoing adjustment, adequate provision shall be made
so that each holder of shares of Series E Preferred Stock shall have the
right to receive upon conversion of a share of Series E Preferred Stock (or
any portion thereof) the amount of Distributed Securities such holder would
have received had such holder converted such share of Series E Preferred
Stock (or portion thereof) immediately prior to such Common Stock Record
Date. If such dividend or distribution is not so paid or made, the
Conversion Price shall again be adjusted to be the Conversion Price which
would then be in effect if such dividend or distribution had not been
declared. If the Board of Directors determines the fair market value of any
distribution for purposes of this Section 12(d)(iv) by reference to the
actual or when issued trading market for any securities constituting all or
part of such distribution, it must in doing so consider the prices in such
market over the same period used in computing the Current Market Price
pursuant to Section 12(d)(vi) to the extent possible.
Rights or warrants distributed by the Company to all holders of shares of
Common Stock entitling the holders thereof to subscribe for or purchase shares
of the Company's capital stock (either initially or under certain
circumstances), which rights or warrants, until the occurrence of a specified
event or events ("Dilution Trigger Event"): (A) are deemed to be transferred
with such shares of Common Stock; (B) are not exercisable; and (C) are also
issued in respect of future issuances of shares of Common Stock, shall be deemed
not to have been distributed for purposes of this Section 12(d)(iv) (and no
adjustment to the Conversion Price under this Section 12(d)(iv) shall be
required) until the occurrence of the earliest Dilution Trigger Event, whereupon
such rights and warrants shall be deemed to have been distributed and an
appropriate
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adjustment to the Conversion Price under this Section 12(d)(iv)
shall be made. If any such rights or warrants, including any such existing
rights or warrants distributed prior to the first issuance of shares of Series E
Preferred Stock, are subject to subsequent events, upon the occurrence of each
of which such rights or warrants shall become exercisable to purchase different
securities, evidences of indebtedness or other assets, then the occurrence of
each such event shall be deemed to be such date of issuance and record date with
respect to new rights or warrants (and a termination or expiration of the
existing rights or warrants, without exercise by the holder thereof). In
addition, in the event of any distribution (or deemed distribution) of rights or
warrants, or any Dilution Trigger Event with respect thereto, that was counted
for purposes of calculating a distribution amount for which an adjustment to the
Conversion Price under this Section 12(d) was made, (1) in the case of any such
rights or warrants which shall all have been redeemed or repurchased without
exercise by any holders thereof, the Conversion Price shall be readjusted upon
such final redemption or repurchase to give effect to such distribution or
Dilution Trigger Event, as the case may be, as though it were a cash
distribution, equal to the per share redemption or repurchase price received by
a holder or holders of shares of Common Stock with respect to such rights or
warrants (assuming such holder had retained such rights or warrants), made to
all holders of shares of Common Stock as of the date of such redemption or
repurchase, and (2) in the case of such rights or warrants which shall have
expired or been terminated without exercise by any holders thereof, the
Conversion Price shall be readjusted as if such rights and warrants had not been
issued.
Notwithstanding any other provision of this Section 12(d)(iv) to the
contrary, rights, warrants, evidences of indebtedness, other securities, cash or
other assets (including, without limitation, any rights distributed pursuant to
any shareholder rights plan) shall be deemed not to have been distributed for
purposes of this Section 12(d)(iv) if the Company makes proper provision so that
each holder of shares of Series E Preferred Stock who converts a share of Series
E Preferred Stock (or any portion thereof) after the date fixed for
determination of shareholders entitled to receive such distribution shall be
entitled to receive upon such conversion, in addition to the shares of Common
Stock issuable upon such conversion, the amount and kind of such distributions
that such holder would have been entitled to receive if such holder had,
immediately prior to such determination date, converted such share of Series E
Preferred Stock into a share of Common Stock.
For purposes of this Section 12(d)(iv) and Sections 12(d)(i) and (ii), any
dividend or distribution to which this Section 12(d)(iv) is applicable that also
includes shares of Common Stock, or rights or warrants to subscribe for or
purchase shares of Common Stock to which Section 12(d)(ii) applies (or both),
shall be deemed instead to be (A) a dividend or distribution of the evidences of
indebtedness, assets, shares of capital stock, rights or warrants other than
such shares of Common Stock or rights or warrants to which Section 12(d)(ii)
applies (and any Conversion Price reduction required by this Section 12(d)(iv)
with respect to such dividend or distribution shall then be made) immediately
followed by (B) a dividend or distribution of such shares of Common Stock or
such rights or warrants (and any further Conversion Price reduction required by
Sections 12(d)(i) or 12(d)(ii) with respect to such dividend or distribution
shall then be made), except that (1) the Common Stock Record Date of such
dividend or distribution shall be substituted as "the date fixed for the
determination of stockholders entitled to receive such dividend or other
distribution", "the Common Stock Record Date fixed for such determination" and
"the Common Stock Record Date" within the meaning of Section 12(d)(i) and as
"the date
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fixed for the determination of shareholders entitled to receive such
rights or warrants", "the Common Stock Record Date fixed for the determination
of the share holders entitled to receive such rights or warrants" and "such
Common Stock Record Date" for purposes of Section 12(d)(ii), and (2) any shares
of Common Stock included in such dividend or distribution shall not be deemed
"outstanding at the close of business on the date fixed for such determination"
for the purposes of Section 12(d)(i).
(v) If a tender offer made by the Company or any of its
subsidiaries for all or any portion of the Common Stock expires and such
tender offer (as amended upon the expiration thereof) requires the payment
to shareholders (based on the acceptance (up to any maximum specified in
the terms of the tender offer) of Purchased Shares) of an aggregate
consideration having a fair market value (as determined by the Board of
Directors, whose good faith determination shall be conclusive and described
in a resolution of the Board of Directors) that, combined together with the
aggregate of the cash plus the fair market value (as determined by the
Board of Directors, whose good faith determination shall be conclusive and
described in a resolution of the Board of Directors) as of the expiration
of such tender offer, of consideration payable in respect of any other
tender offers by the Company or any of its subsidiaries for all or any
portion of the shares of Common Stock expiring within the 12 months
preceding the expiration of such tender offer and in respect of which no
adjustment pursuant to this Section 12(d)(v) has been made, exceeds 5% of
the net income of the Company reported for the 12 month period ending with
the fiscal quarter next preceding such payment (the "12 Month Net Income")
(determined as of the last time (the "Expiration Time") tenders could have
been made pursuant to such tender offer (as it may be amended) then, and in
each such case, immediately prior to the opening of business on the day
after the date of the Expiration Time, the Conversion Price shall be
adjusted so that the same shall equal the price determined by multiplying
the Conversion Price in effect immediately prior to the close of business
on the date of the Expiration Time by a fraction of which the numerator
shall be the number of shares of Common Stock outstanding (including any
tendered shares) at the Expiration Time multiplied by the Current Market
Price of a share of Common Stock on the trading day next succeeding the
Expiration Time and the denominator shall be the sum of (x) the fair market
value (determined as aforesaid) of the aggregate consideration payable to
shareholders based on the acceptance (up to any maximum specified in the
terms of the tender offer) of all shares validly tendered and not withdrawn
as of the Expiration Time (the shares deemed so accepted, up to any such
maximum, being referred to as the "Purchased Shares") and (y) the product
of the number of shares of Common Stock outstanding (less any Purchased
Shares) at the Expiration Time and the Current Market Price of the shares
of Common Stock on the trading day next succeeding the Expiration Time,
such reduction (if any) to become effective immediately prior to the
opening of business on the day following the Expiration Time. If the
Company is obligated to purchase shares pursuant to any such tender offer,
but the Company is permanently prevented by applicable law from effecting
any such purchases or all such purchases are rescinded, the Conversion
Price shall again be adjusted to be the Conversion Price which would then
be in effect if such tender offer had not been made. If the application of
this Section 12(d)(v) to any tender offer would result in an increase in
the Conversion Price, no adjustment shall be made for such tender offer
under this Section 12(d)(v).
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(vi) For purposes of this Section 12(d), the following terms shall
have the meaning indicated:
"closing price" with respect to any securities on any day means the closing
sale price as of 4:00 p.m. Eastern Time on such day or any earlier final closing
on such day or, if no such sale takes place on such day, the average of the
reported high and low bid prices on such day, in each case on the Nasdaq
National Market, or the New York Stock Exchange, as applicable, or, if such
security is not listed or admitted to trading on such national market or
exchange, on the national stock exchange or Commission recognized trading market
in the United States on which such security is quoted or listed or admitted to
trading, or, if not quoted or listed or admitted to trading on any national
stock exchange or Commission recognized trading market in the United States, the
average of the high and low bid prices of such security on the over-the-counter
market on the day in question as reported by the National Quotation Bureau
Incorporated or a similar generally accepted reporting service in the United
States, or, if not so available, in such manner as furnished by any New York
Stock Exchange member firm selected from time to time by the Board of Directors
for that purpose, or a price determined in good faith by the Board of Directors,
whose determination shall be conclusive and described in a resolution of the
Board of Directors.
"Common Stock Record Date" means, with respect to any dividend,
distribution or other transaction or event in which the holders of Common Stock
have the right to receive any cash, securities or other property or in which the
Common Stock (or other applicable security) is exchanged for or converted into
any combination of cash, securities or other property, the date fixed for
determination of shareholders entitled to receive such cash, securities or other
property (whether such date is fixed by the Board of Directors or by statute,
contract or otherwise).
"Current Market Price" means the average of the daily closing prices per
share of Common Stock for the 10 consecutive trading days immediately prior to
the date in question; provided, however, that (A) if the "ex" date (as
hereinafter defined) for any event (other than the issuance or distribution
requiring such computation) that requires an adjustment to the Conversion Price
pursuant to Section 12(d)(i), (ii), (iii), (iv) or (v) occurs during such 10
consecutive trading days, the closing price for each trading day prior to the
"ex" date for such other event shall be adjusted by multiplying such closing
price by the same fraction by which the Conversion Price is so required to be
adjusted as a result of such other event, (B) if the "ex" date for any event
(other than the issuance or distribution requiring such computation) that
requires an adjustment to the Conversion Price pursuant to Section 12(d)(i),
(ii), (iii), (iv) or (v) occurs on or after the "ex" date for the issuance or
distribution requiring such computation and prior to the day in question, the
closing price for each trading day on and after the "ex" date for such other
event shall be adjusted by multiplying such closing price by the reciprocal of
the fraction by which the Conversion Price is so required to be adjusted as a
result of such other event and (C) if the "ex" date for the issuance or
distribution requiring such computation is prior to the day in question, after
taking into account any adjustment required pursuant to clause (A) or (B) of
this proviso, the closing price for each trading day on or after such "ex" date
shall be adjusted by adding thereto the amount of any cash and the fair market
value (as determined by the Board of Directors in a manner consistent with any
good faith determination of such value for purposes of Section 12(d)(iv), whose
good faith determination shall be conclusive and described in a resolution of
the Board of Directors) of the evidences of indebtedness, shares of capital
stock or
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assets being distributed applicable to one share of Common Stock as of
the close of business on the day before such "ex" date. For purposes of any
computation under Section 12(d)(v), the Current Market Price on any date shall
be deemed to be the average of the daily closing prices per share of Common
Stock for such day and the next two succeeding trading days; provided, however,
that, if the "ex" date for any event (other than the tender offer requiring such
computation) that requires an adjustment to the Conversion Price pursuant to
Section 12(d)(i), (ii), (iii), (iv) or (v) occurs on or after the Expiration
Time for the tender or exchange offer requiring such computation and prior to
the day in question, the closing price for each trading day on and after the
"ex" date for such other event shall be adjusted by multiplying such closing
price by the reciprocal of the fraction by which the Conversion Price is so
required to be adjusted as a result of such other event. For purposes of this
paragraph, the term "ex" date (1) when used with respect to any issuance or
distribution, means the first date on which the shares of Common Stock trade
regular way on the relevant exchange or in the relevant market from which the
closing price was obtained without the right to receive such issuance or
distribution, (2) when used with respect to any subdivision or combination of
shares of Common Stock, means the first date on which the shares of Common Stock
trade regular way on such exchange or in such market after the time at which
such subdivision or combination becomes effective and (3) when used with respect
to any tender or exchange offer means the first date on which the shares of
Common Stock trade regular way on such exchange or in such market after the
Expiration Time of such offer. Notwithstanding the foregoing, whenever
successive adjustments to the Conversion Price are called for pursuant to this
Section 12(d), such adjustments shall be made to the Current Market Price as may
be necessary or appropriate to effectuate the intent of this Section 12(d) and
to avoid unjust or inequitable results, as determined in good faith by the Board
of Directors.
"Fair Market Value" means the amount which a willing buyer would pay a
willing seller in an arm's-length transaction.
(vii) No adjustment in the Conversion Price shall be required
unless such adjustment would require an increase or decrease of at least 1%
in such price; provided, however, that any adjustments which by reason of
this Section 12(d)(vii) are not required to be made shall be carried
forward and taken into account in any subsequent adjustment. All
calculations under this Section 12 shall be made by the Company and shall
be made to the nearest cent. No adjustment need be made for a change in the
par value or no par value of the Common Stock.
(viii) Whenever the Conversion Price is adjusted as herein
provided, the Company shall promptly file with the Registrar an Officers'
Certificate setting forth the Conversion Price after such adjustment and
setting forth a brief statement of the facts requiring such adjustment.
Promptly after delivery of such certificate, the Company shall prepare a
notice of such adjustment of the Conversion Price setting forth the
adjusted Conversion Price and the date on which each adjustment becomes
effective and shall mail such notice of such adjustment of the Conversion
Price to each holder of shares of Series E Preferred Stock at such holder's
last address appearing on the register of holders maintained for that
purpose within 20 days of the effective date of such adjustment. Failure to
deliver such notice shall not affect the legality or validity of any such
adjustment.
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<PAGE>
(ix) In any case in which this Section 12(d) provides that an
adjustment shall become effective immediately after a Common Stock Record
Date for an event, the Company may defer until the occurrence of such event
issuing to the holder of any share of Series E Preferred Stock converted
after such Common Stock Record Date and before the occurrence of such event
the additional shares of Common Stock issuable upon such conversion by
reason of the adjustment required by such event over and above the shares
of Common Stock issuable upon such conversion before giving effect to such
adjustment.
(x) For purposes of this Section 12(d), the number of shares of
Common Stock at any time outstanding shall not include shares held in the
treasury of the Company. The Company shall not pay any dividend or make any
distribution on shares of Common Stock held in the treasury of the Company.
(e) Subject to Section 13, in case of any consolidation of the
Company with, or merger of the Company into, any other corporation, or in case
of any merger of another corporation into the Company (other than a merger that
does not result in any reclassification, conversion, exchange or cancellation of
outstanding shares of Common Stock of the Company), or in case of any sale,
conveyance or transfer of all or substantially all the assets of the Company,
the holder of each share of Series E Preferred Stock shall have the right
thereafter, during the period such share of Series E Preferred Stock shall be
convertible as specified in Section 12(a), to convert such share of Series E
Preferred Stock into the kind and amount of securities, cash and other property
receivable upon such consolidation, merger, conveyance or transfer by a holder
of the number of shares of Common Stock of the Company into which such share of
Series E Preferred Stock might have been converted immediately prior to such
consolidation, merger, conveyance or transfer, assuming such holder of shares of
Common Stock of the Company failed to exercise his rights of election, if any,
as to the kind or amount of securities, cash and other property receivable upon
such consolidation, merger, conveyance or transfer (provided that, if the kind
or amount of securities, cash and other property receivable upon such
consolidation, merger, conveyance or transfer is not the same for each share of
Common Stock of the Company in respect of which such rights of election shall
not have been exercised ("nonelecting share"), then for the purpose of this
Section 12 the kind and amount of securities, cash and other property receivable
upon such consolidation, merger, conveyance or transfer by each nonelecting
share shall be deemed to be the kind and amount so receivable per share by a
plurality of the nonelecting shares). Such securities shall provide for
adjustments which, for events subsequent to the effective date of the triggering
event, shall be as nearly equivalent as may be practicable to the adjustments
provided for in this Section 12. The above provisions of this Section 12 shall
similarly apply to successive consolidations, mergers, conveyances or transfers.
(f) In case:
(i) the Company shall declare a dividend (or any other
distribution) on its Common Stock payable otherwise than in cash out of its
earned surplus; or
(ii) the Company shall authorize the granting to all holders of its
shares of Common Stock of rights or warrants to subscribe for or purchase
any shares of capital stock of any class or of any other rights; or
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<PAGE>
(iii) of any reclassification of the Common Stock (other than a
subdivision or combination of the Company's outstanding shares of Common
Stock), or of any consolidation or merger to which the Company is a party
and for which approval of any shareholders of the Company is required, or
the sale, conveyance or transfer of all or substantially all the assets of
the Company; or
(iv) of the voluntary or involuntary dissolution, liquidation or
winding-up of the Company;
then the Company shall cause to be filed with the Registrar and at
each office or agency maintained for the purpose of conversion of shares of
Series E Preferred Stock, and shall cause to be mailed to all holders at
their last addresses as they shall appear in the shares of Series E
Preferred Stock Register, at least 20 Business Days (or 10 Business Days in
any case specified in clause (i) or (ii) above) prior to the applicable
date hereinafter specified, a notice stating (x) the date on which a record
is to be taken for the purpose of such dividend, distribution, rights or
warrants, or, if a record is not to be taken, the date as of which the
holders of shares of Common Stock of record to be entitled to such
dividend, distribution, rights or warrants are to be determined or (y) the
date on which such reclassification, consolidation, merger, sale, transfer,
dissolution, liquidation or winding-up is expected to become effective, and
the date as of which it is expected that holders of shares of Common Stock
of record shall be entitled to exchange their shares of Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer, dissolution, liquidation or winding-
up. Failure to give the notice required by this Section 12(f) or any
defect therein shall not affect the legality or validity of any dividend,
distribution, right, warrant, reclassification, consolidation, merger,
sale, transfer, dissolution, liquidation or winding-up, or the vote upon
any such action.
(g) The Company shall at all times reserve and keep available,
free from preemptive rights, out of its authorized but unissued shares of Common
Stock, for the purpose of effecting the conversion of shares of Series E
Preferred Stock, the full number of shares of Common Stock then issuable upon
the conversion of all outstanding shares of Series E Preferred Stock.
(h) The Company will pay any and all taxes that may be payable
in respect of the issue or delivery of shares of Common Stock on conversion of
shares of Series E Preferred Stock pursuant hereto. The Company shall not,
however, be required to pay any tax which may be payable in respect of any
transfer involved in the issue and delivery of shares of Common Stock in a name
other than that of the holder of the share of Series E Preferred Stock or shares
of Series E Preferred Stock to be converted, and no such issue or delivery shall
be made unless and until the Person requesting such issue has paid to the
Company the amount of any such tax, or has established to the satisfaction of
the Company that such tax has been paid or is not payable.
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13. Change of Control
-----------------
(a) If a Change of Control shall have occurred, the Company shall
cause to be filed with the Registrar and at each office or agency maintained for
the purpose of conversion of shares of Series E Preferred Stock, and shall cause
to be mailed to all holders at their last addresses as they shall appear in the
Series E Preferred Stock Register, in any case within 10 days after the Change
of Control Date, a notice stating (1) the Change of Control Date, (2) the fact
that if the Change of Control Date is prior to March 31, 2005, the holders shall
receive the Special Dividend as a result of such Change of Control, (3) the fact
that holders shall have the right to either (a) continue to hold their shares of
Series E Preferred Stock (or the shares of preferred stock issued in respect
thereof pursuant to Section 14) (the "Hold Option"), (b) convert such shares in
accordance with Section 12 or (c) elect the Remarketing Option (as defined
below), (4) the relevant circumstances and facts regarding such Change of
Control and (5) the instructions that such holder must follow in order to
exercise the rights identified above. The holders of Series E Preferred Stock
shall receive the Special Dividend as of the Change of Control Date if the
Change of Control Date occurs prior to March 31, 2005, whether they elect the
Hold Option or the Remarketing Option or whether they elect to convert their
shares in accordance with Section 12.
(b) Within 30 days after delivery by the Company of the notice
described in Section 13(a), each holder of shares of Series E Preferred Stock
(or the shares of preferred stock issued in respect thereof pursuant to Section
14) who wishes to exercise the Hold Option or the Remarketing Option must submit
written notice (a "COC Response Notice") to the Company setting forth the option
such holder wishes to elect (and if no option is selected within such 30 day
period such holder shall be deemed to have selected the Hold Option).
(c) If the Hold Option is selected with respect to a share of
Series E Preferred Stock, or if no notice from a holder is received by the date
referred to in the preceding paragraph, such holder shall be deemed to have
elected to waive such holder's right to elect the Remarketing Option with
respect to such Change of Control (but not the continuing right to convert
pursuant to Section 12) and such share of Series E Preferred Stock (or the
shares of preferred stock issued in respect thereof pursuant to Section 14)
shall remain outstanding in accordance with its current terms after giving
effect to the Special Dividend (if applicable).
(d) If the Remarketing Option is selected with respect to a share
of Series E Preferred Stock, such holder shall be deemed to have elected to
waive such holder's right to elect the Hold Option or to convert such holder's
shares pursuant to Section 12 during the Remarketing Period and the Company
shall thereafter have the option (the "Remarketing Option") to either (a) have
such share redeemed in accordance with the optional redemption procedures set
forth in Section 10 or (b) remarket such share for the account of such holder
and, if the net proceeds to such holder of such remarketing are less than an
amount in cash equal to 101% of the Liquidation Preference of such share (after
giving effect to the Special Dividend if applicable) plus accrued and unpaid
dividends thereon from the last Dividend Payment Date to the date payment in
full is received by such holder in respect of such share (the "Remarketing
Price"), the Company shall issue to and sell for the account of such holder a
sufficient number of shares of Common Stock to make up such shortfall; i.e.,
such that the holder receives a net amount in cash in respect of such share of
Series E Preferred Stock as to which the Remarketing Option has been selected
which, when taken together with the net proceeds received by such
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<PAGE>
holder in such remarketing, is equal to the Remarketing Price. Written notice of
the election by the Company to either redeem or remarket such share shall be
provided to such holder within 10 days after receipt of a COC Response Notice
specifying the Remarketing Option.
(e) In order to accomplish the remarketing, the Company shall
take all actions that may be necessary, including without limitation, preparing
and filing a registration statement under the Securities Act of 1933, and shall
pay all expenses (including without limitation, underwriting discounts)
associated with the remarketing and issuance and shall provide customary
indemnification for the benefit of the holder against securities law liabilities
in connection therewith. Without limiting the generality of the foregoing, the
Company shall use its best efforts to remarket the shares with respect to which
the Remarketing Option has been elected as expeditiously as reasonably
practicable. If the Remarketing Option has been selected and the Company has not
elected to redeem such share, payment of the full Remarketing Price in respect
of the remarketed share shall be made at a single settlement against surrender
of the share. Such settlement shall take place as soon as reasonably
practicable. If such settlement does not take place within 180 days after the
date of the Company's written notice pursuant to paragraph (d) above (the
"Remarketing Period"), the Company shall give written notice to the Holders that
have elected the Remarketing Option that such 180 day period has elapsed and
each such Holder shall have the option, for a period of 10 Business Days
following the giving of such notice, of terminating the remarketing process with
respect to such Holder's shares and electing to convert such Holder's shares
pursuant to Section 12 or the Hold Option. If such Holder does not so elect, the
Company will continue to effect the remarketing.
(f) The Company shall have the right to institute reasonable
procedures in order to implement this Section 13 and, to the extent reasonably
practicable, will make proper provision prior to the Change of Control Date to
ensure that the holders of shares of Series E Preferred Stock will be entitled
to receive the benefits intended to be afforded by this Section 13. Nothing in
this Section 13 shall affect the rights of the holders of Series E Preferred
Stock set forth in Section 14 hereof.
14. Consolidation, Merger, Conveyance or Transfer. Without the vote or
consent of the holders of a majority of the then Outstanding shares of Series E
Preferred Stock, the Company may not consolidate or merge with or into, or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of its assets to, any person unless (i) if the Company is the surviving or
continuing person, the Series E Preferred Stock shall remain outstanding without
any amendment that would adversely affect the preferences, rights or powers of
the Series E Preferred Stock, (ii) if the Company is not the surviving or
continuing person, (a) the entity formed by such consolidation or merger or to
which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made (in any such case, the "resulting entity") is a corporation
organized and existing under the laws of Bermuda, the United States or any State
thereof or the District of Columbia; and (b) the shares of Series E Preferred
Stock are converted into or exchanged for and become shares of such resulting
entity, having in respect of such resulting entity the same (or more favorable)
powers, preferences and relative, participating, optional or other special
rights that the shares of Series E Preferred Stock had immediately prior to such
transaction; and (iii) the Company shall have delivered to the Registrar an
Officers' Certificate and an opinion of counsel, reasonably satisfactory in form
and content, each stating
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that such consolidation, merger, conveyance or transfer complies with this
Section 14 and that all conditions precedent herein provided for relating to
such transaction have been complied with.
15. SEC Reports; Reports by Company. So long as any shares of Series E
Preferred Stock are outstanding, the Company shall file with the SEC and, within
15 days after it files them with the SEC, with the Registrar and, if requested,
furnish to each holder of shares of Series E Preferred Stock all annual and
quarterly reports and the information, documents, and other reports that the
Company is required to file with the SEC pursuant to Section 13(a) or 15(d) of
the Exchange Act ("SEC Reports"). In the event the Company is not required or
shall cease to be required to file SEC Reports, pursuant to the Exchange Act,
the Company will nevertheless file such reports with the SEC (unless the SEC
will not accept such a filing). Whether or not required by the Exchange Act to
file SEC Reports with the SEC, so long as any shares of Series E Preferred Stock
are Outstanding, the Company will furnish or cause to be furnished copies of the
SEC Reports to the holders of shares of Series E Preferred Stock at the time the
Company is required to make such information available to the Registrar and to
prospective investors who request it in writing.
16. Definitions. For purposes of this Certificate of Designation, the
following terms shall have the meaning set forth below:
"Accumulated Dividends" has the meaning set forth in Section 6.
"Affiliate" means, with respect to any Person, any other Person directly or
indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For the purposes of this definition, "control" when
used with respect to any Person means the power to direct the management and
policies of such Person, directly or indirectly, whether through the ownership
of voting securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Board of Directors" has the meaning set forth in the Recitals.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in The City of New York are
authorized or obligated by law or executive order to be closed.
"By-laws" has the meaning set forth in the Recitals.
"COC Response Notice" has the meaning set forth in Section 13(b).
"Capital Stock" means, with respect to any person, any and all shares,
interests, participations, rights in, or other equivalents (however designated
and whether voting and/or non-voting) of such person's capital stock, whether
outstanding on the Closing Date or issued after the Closing Date, and any and
all rights (other than any evidence of indebtedness), warrants or options
exchangeable for or convertible into such capital stock.
"Certificate of Incorporation" has the meaning set forth in the recitals.
"Change of Control" means the occurrence of any of the following events:
(a) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d)
of the Exchange Act) is
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or becomes the "beneficial owner" (as defined in Rule 13d-3 and 13d-5 under the
Exchange Act, except that a person shall be deemed to have "beneficial
ownership" of all securities that such person has the right to acquire, whether
such right is exercisable immediately or only after the passage of time),
directly or indirectly, of more than 50% of the total Voting Capital Stock of
the Company or (b) the Company consolidates with, or merges with or into,
another person or sells, assigns, conveys, transfers, leases or otherwise
disposes of all or substantially all of its assets to any person, or any person
consolidates with, or merges with or into the Company, in any such event
pursuant to a transaction in which the holders of the outstanding Voting Capital
Stock of the Company immediately prior to such transaction hold less than 50% of
the outstanding Voting Capital Stock of the surviving or transferee company or
its parent company immediately after such transaction or immediately after such
transaction any "person" or "group" (as such terms are used in Sections 13(d)
and 14(d) of the Exchange Act), is the "beneficial owner" (as defined in Rules
13d-3 and 13d-5 under the Exchange Act, except that a person shall be deemed to
have "beneficial ownership" of all securities that such person has the right to
acquire, whether such right is exercisable immediately or only after the passage
of time), directly or indirectly, of more than 50% of the total Voting Capital
Stock of the surviving or transferee company or its parent company or (c) during
any consecutive two-year period, individuals who at the beginning of such period
constituted the Board of Directors (together with any new directors whose
election by the Board of Directors or whose nomination for election by the
stockholders of the Company was approved by a vote of a majority of the
directors then still in office who were either directors at the beginning of
such period or whose election or nomination for election was previously so
approved) cease for any reason to constitute a majority of the Board of
Directors then in office or (d) any transaction subject to Rule 13e-3 under the
Exchange Act if following such Rule 13e-3 transaction a person or group (as such
terms are used in Section 13(d) and 14(d) of the Exchange Act) owns more than
50% of the total Voting Capital Stock of the Company.
"Change of Control Date" has the meaning set forth in Section 6(b).
"Closing Date" means any Closing Date under the Purchase Agreement.
"Closing Price" has the meaning set forth in Section 12(d)(vi).
"Common Stock Record Date" has the meaning set forth in Section 12(d)(vi).
"Common Stock" means the common stock of the Company, par value $.001 per
share and capital stock of any other class or series into which the common stock
may hereafter be changed.
"Company" has the meaning set forth in the Recitals and includes any
successor to the Company hereunder.
"Company Order" means a written request or order signed in the name of the
Company by its Chairman of the Board, its President or a Vice President and by
its Treasurer, an Assistant Treasurer, its Secretary or an Assistant Secretary.
"Conversion Agent" has the meaning set forth in Section 5(a).
24
<PAGE>
"Conversion Price" means the price at which shares of Common Stock shall be
delivered upon conversion.
"Current Market Value" of the Common Stock means the average of the high
and low sale prices of the shares of Common Stock as reported on the Nasdaq
National Market or any national stock exchange or Commission recognized trading
market in the United States upon which the shares of Common Stock are then
listed or admitted to trading, for the trading day in question.
"Current Market Price" has the meaning set forth in Section 12(d)(vi).
"Dilution Trigger Event" has the meaning set forth in Section 12(d)(iv).
"Distributed Securities" has the meaning set forth in Section 12(d)(iv).
"Dividend Payment Date" shall mean the last day of March, June, September
and December of each year, commencing March 31, 2000, or the next succeeding
Business Day if any such day is not a Business Day.
"Dividend Period" shall mean the period from and including the Closing Date
to but excluding the first Dividend Payment Date and thereafter each quarterly
period from and including a Dividend Payment Date to but excluding the next
Dividend Payment Date.
"Dividend Record Date" has the meaning set forth in Section 7(a).
"Expiration Time" has the meaning set forth in Section 12(d)(v).
"Fair Market Value" has the meaning set forth in Section 12(d)(vi).
"Junior Shares" has the meaning set forth in Section 9(a).
"Liquidation Preference" means an amount initially equal to $1,000 per
share of Series E Preferred Stock, subject to increase in accordance with
Section 6, Section 7 and Section 11 hereof, including, without limitation, by
the addition of Accumulated Dividends and, if applicable, the Special Dividend.
"Mandatory Redemption Date" has the meaning set forth in Section 10(b);
provided, however, that if such date shall not be a Business Day, then such date
shall be the next Business Day.
"Nonelecting Share" has the meaning set forth in Section 12(e).
"Odd-lot Redemption" has the meaning set forth in Section 10(c).
"Officers' Certificate" means a certificate of the Company signed in the
name of the Company by its Chairman of the Board, its President or a Vice
President and by its Treasurer, an Assistant Treasurer, its Secretary or an
Assistant Secretary.
"Optional Redemption" has the meaning set forth in Section 10(a).
25
<PAGE>
"Optional Redemption Date" has the meaning set forth in Section 10(a).
"Outstanding" means when used with respect to shares of Series E Preferred
Stock, as of the date of determination, all shares of Series E Preferred Stock
theretofore authenticated and delivered under this Certificate of Designation,
except (a) shares of Series E Preferred Stock theretofore converted into shares
of Common Stock in accordance with Section 12 and shares of Series E Preferred
Stock theretofore canceled by the Registrar or delivered to the Registrar for
cancellation; (b) shares of Series E Preferred Stock for whose payment or
redemption money in the necessary amount has been theretofore deposited with the
Registrar or any Paying Agent (other than the Company) in trust or set aside and
segregated in trust by the Company (if the Company shall act as its own Paying
Agent) for the holders of such shares of Series E Preferred Stock; provided
that, if such shares of Series E Preferred Stock are to be redeemed, notice of
such redemption has been duly given pursuant to this Certificate of Designation
or provision therefor satisfactory to the Registrar has been made; and (c)
shares of Series E Preferred Stock (x) that are mutilated, destroyed, lost or
stolen which the Company has decided to pay or (y) in exchange for or in lieu of
which other shares of Series E Preferred Stock have been authenticated and
delivered pursuant to this Certificate of Designation; provided, however, that,
in determining whether the holders of the shares of Series E Preferred Stock
have given any request, demand, authorization, direction, notice, consent or
waiver or taken any other action hereunder, shares of Series E Preferred Stock
owned by the Company or any other obligor upon the shares of Series E Preferred
Stock or any Affiliate of the Company or of such other obligor shall be
disregarded and deemed not to be Outstanding, except that, in determining
whether the Registrar shall be protected in relying upon any such request,
demand, authorization, direction, notice, consent, waiver or other action, only
shares of Series E Preferred Stock which the Registrar has actual knowledge of
being so owned shall be so disregarded. Shares of Series E Preferred Stock so
owned which have been pledged in good faith may be regarded as Outstanding if
the pledgee establishes to the satisfaction of the Registrar the pledgee's right
so to act with respect to such shares of Series E Preferred Stock and that the
pledgee is not the Company or any other obligor upon the shares of Series E
Preferred Stock or any Affiliate of the Company or of such other obligor.
"Parity Shares" has the meaning set forth in Section 9(a).
"Paying Agent" has the meaning set forth in Section 5(a).
"Person" means an individual, partnership, corporation, limited liability
company, business trust, joint stock company, trust, unincorporated association,
joint venture, governmental authority or other entity of whatever nature.
"Preferred Stock" means, with respect to any person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) of such person's preferred or preference stock, whether
now outstanding or issued after the date hereof, including all Series End
classes of such preferred or preference stock.
"Purchase Agreement" means the Preferred Stock and Warrant Purchase
Agreement dated as of February 6, 2000, among the Company and the Purchasers
named therein, as it may be amended from time to time.
26
<PAGE>
"Purchased Shares" has the meaning set forth in Section 12(d)(v).
"Redemption Date" has the meaning set forth in Section 10(d).
"Redemption Notice" has the meaning set forth in Section 10(d).
"Redemption Price" has the meaning set forth in Section 10(a).
"Registrar" has the meaning set forth in Section 3.
"Registration Rights Agreement" means the Registration Rights Agreement
dated as of March 16, 2000, among the Company and the Purchasers.
"Remarketing Option" has the meaning set forth in Section 13(d).
"Restricted Shares Legend" has the meaning set forth in Section 4(a).
"Resulting Entity" has the meaning set forth in Section 14.
"SEC" means the Securities and Exchange Commission, as from time to time
constituted, created under the Securities Exchange Act of 1934, or, if at any
time after the adoption of this Certificate of Designation such commission is
not existing and performing the duties now assigned to it, then the body
performing such duties at such time.
"SEC Reports" has the meaning set forth in Section 15.
"Securities Act" has the meaning set forth in Section 4(a).
"Senior Shares" has the meaning set forth in Section 9(a).
"Series E Preferred Stock" has the meaning set forth in Section 1.
"Special Dividend" means, with respect to each share of Series E Preferred
Stock, the difference between (i) $1,504.26 (as such number shall be
appropriately adjusted for stock splits, stock dividends or similar events
affecting the Series E Preferred Stock) and (ii) the amount of the actual
Liquidation Preference of such share immediately prior to the Change of Control
Date.
"Voting Capital Stock" means with respect to any Person, securities of any
class or classes of Capital Stock in such Person ordinarily entitling the
holders thereof (whether at all times or at the times that such class of Capital
Stock has voting power by reason of the happening of any contingency) to vote in
the election of members of the board of directors or comparable governing body
of such Person.
27
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Certificate of Designation
to be duly executed by Catherine Hapka, Chairman and Chief Executive Officer of
the Company, this 16th day of March, 2000.
RHYTHMS NETCONNECTIONS INC.,
By:
-------------------------
Name: Catherine Hapka
Title: Chairman and CEO
28
<PAGE>
EXHIBIT A
---------
FACE OF SECURITY
Restricted Legend "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY STATE OR OTHER
JURISDICTION, AND, UNLESS SO REGISTERED, THEY MAY NOT BE SOLD, OFFERED FOR SALE,
TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED EXCEPT PURSUANT TO AN EXEMPTION
FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
ACT AND APPLICABLE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION."
Number of Shares
Number: ____ ____ Shares
CUSIP NO.: { }
8.25% SERIES E CONVERTIBLE PREFERRED STOCK
DUE 2015
OF
RHYTHMS NETCONNECTIONS INC.
RHYTHMS NETCONNECTIONS INC., a company organized under the laws of Delaware
(the "Company"), hereby certifies that {HOLDER} (the "Holder") is the registered
owner of fully paid and non-assessable preference securities of the Company
designated the 8.25% Series E Convertible Preferred Stock due 2015, par value
U.S.$0.001 and initial liquidation preference U.S.$1,000 per share (the
"Preferred Stock"). The shares of Preferred Stock are transferable on the books
and records of the Registrar, in person or by a duly authorized attorney, upon
surrender of this certificate duly endorsed and in proper form for transfer.
The designation, rights, privileges, restrictions, preferences and other terms
and provisions of the Preferred Stock represented hereby are issued and shall in
all respects be subject to the provisions of the Certificate of Designation of
the Company dated March __, 2000, as the same may be amended from time to time
in accordance with its terms (the "Preferred Stock Certificate of Designation").
Capitalized terms used herein but not defined shall have the meaning given them
in the Preferred Stock Certificate of Designation. The Company will provide a
copy of the Preferred Stock Certificate of Designation to a Holder without
charge upon written request to the Company at its principal place of business.
Reference is hereby made to select provisions of the Preferred Stock set
forth on the reverse hereof, and to the Preferred Stock Certificate of
Designation, which select provisions and
<PAGE>
the Preferred Stock Certificate of Designation shall for all purposes have the
same effect as if set forth at this place.
Upon receipt of this certificate, the Holder is bound by the Preferred
Stock Certificate of Designation and is entitled to the benefits thereunder.
Unless the Transfer Agent's valid counter-signature appears hereon, the
shares of Preferred Stock evidenced hereby shall not be entitled to any benefit
under the Preferred Stock Certificate of Designation or be valid or obligatory
for any purpose.
IN WITNESS WHEREOF, the Company has executed this certificate as of the
date set forth below.
RHYTHMS NETCONNECTIONS INC.,
By:
-------------------------
Name:
Title:
{Seal}
By:
-------------------------
Name:
Title:
Dated:
COUNTERSIGNED AND REGISTERED
{ }
as Transfer Agent,
By:
-------------------------
Authorized Signatory
Dated:
2
<PAGE>
REVERSE OF SECURITY
RHYTHM NETCONNECTIONS INC.
8.25% Series E Convertible Preferred Stock
due 2015
Dividends on each share of Preferred Stock shall be payable at a rate per
annum set forth on the face hereof or as provided in the Preferred Stock
Certificate of Designation. Subject to the limitations set forth in Section 11
of the Preferred Stock Certificate of Designation, dividends may be paid, at the
option of the Company, in cash or as otherwise set forth in the Preferred Stock
Certificate of Designation.
The shares of Preferred Stock shall be redeemable as provided in the
Preferred Stock Certificate of Designation. The shares of Preferred Stock shall
be convertible into the Company's Common Stock in the manner and according to
the terms set forth in the Preferred Stock Certification of Designation.
The Company shall furnish to any Holder upon request and without charge, a
copy of the voting rights preferences, limitations and special rights of the
shares of each class or Series E authorized to be issued by the Company so far
as they have been fixed and determined and the authority of the Board of
Directors to fix and determine the designations, voting rights, preferences,
limitations and special rights of the class and series of shares of the Company.
ASSIGNMENT
FOR VALUE RECEIVED, the undersigned assigns and transfers the shares of
Preferred Stock evidenced hereby to:
(Insert assignee's social security or tax identification number)
(Insert address and zip code of assignee)
and irrevocably appoints:
agent to transfer the shares of Preferred Stock evidenced hereby on the books of
the Transfer Agent and Registrar. The agent may substitute another to act for
him or her.
Date: Signature:
--------------------------- -----------------------
(Sign exactly as your name appears on the other side of this Convertible
Preferred Stock Certificate)
Signature Guarantee:*
----------------------------------
<PAGE>
* Signature must be guaranteed by an "eligible guarantor institution"
(i.e., a bank, stockbroker, savings and loan association or credit union)
meeting the requirements of the Registrar, which requirements include membership
or participation in the Securities Transfer Agents Medallion Program ("STAMP")
or such other "signature guarantee program" as may be determined by the
Registrar in addition to, or in substitution for, STAMP, all in accordance with
the Securities Exchange Act of 1934.
2
<PAGE>
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert the Preferred Stock)
The undersigned hereby irrevocably elects to convert (the "Conversion")
_________ shares of 8.25% Series E Convertible Preferred Stock due 2015 (the
"Preferred Stock"), represented by stock certificate No(s). ______________ (the
"Preferred Stock Certificates") into shares of common stock, par value U.S.
$.001 per share ("Common Stock"), of Rhythms NetConnections Inc. (the "Company")
according to the conditions of the Certificate of Designation establishing the
terms of the Preferred Stock (the "Preferred Stock Certificate of Designation"),
as of the date written below. If shares are to be issued in the name of a
person other than the undersigned, the undersigned will pay all transfer taxes
payable with respect thereto and is delivering herewith such certificates. No
fee will be charged to the holder for any conversion, except for transfer taxes,
if any. A copy of each Preferred Stock Certificate is attached hereto (or
evidence of loss, theft or destruction thereof).*
The undersigned represents and warrants that all offers and sales by the
undersigned of the shares of Common Stock issuable to the undersigned upon
conversion of the Preferred Stock shall be made pursuant to registration of the
Common Stock under the Securities Act of 1933 (the "Act"), or pursuant to an
exemption from registration under the Act.
Capitalized terms used but not defined herein shall have the meanings ascribed
thereto in or pursuant to the Preferred Stock Certificate of Designation.
Date of Conversion: __________________
Applicable Conversion Price: _________
Number of shares of Preferred Stock to be Converted: _______
Number of shares of Common Stock to be Issued: _____________
Signature: ___________________________
Name: ________________________________
Address: _____________________________
Fax No.: _____________________________
* The Company is not required to issue shares of Common Stock until the
original Preferred Stock Certificate(s) (or evidence of loss, theft or
destruction thereof) to be converted are received by the Company or its Transfer
Agent. The Company shall issue and deliver shares of Common Stock to an
overnight courier not later than three business days following receipt of the
original Preferred Stock Certificate(s) to be converted.
<PAGE>
** Address where shares of Common Stock and any other payments or
certificates shall be sent by the Company.
4
<PAGE>
Exhibit 4.18
RHYTHMS NETCONNECTIONS INC., as Issuer
and
STATE STREET BANK AND TRUST COMPANY OF CALIFORNIA, N.A., as Trustee
INDENTURE
Dated as of February 23, 2000
$300,000,000 principal amount
14% Senior Notes due 2010, Series A
14% Senior Notes due 2010, Series B
<PAGE>
Reconciliation and tie between Trust Indenture Act of 1939,
as amended, and Indenture, dated as of February 23, 2000
<TABLE>
<CAPTION>
Trust Indenture Indenture
Act Section Section
- --------------- ---------
<S> <C>
(S) 310 (a) (1) ............................................................................. 6.09
(a) (2) ............................................................................. 6.09
(a) (3) ............................................................................. Not Applicable
(a) (4) ............................................................................. 6.05
(b) ............................................................................. 6.05, 6.08
6.10
(S) 311 (a) ............................................................................. 6.07
(b) ............................................................................. 6.07
(c) ............................................................................. Not Applicable
(S) 312 (a) ............................................................................. 3.05, 7.01
(b) ............................................................................. 7.02
(c) ............................................................................. 7.02
(S) 313 (a) ............................................................................. 7.03
(b) ............................................................................. 7.03
(c) ............................................................................. 7.03
(d) ............................................................................. 7.03
(S) 314 (a) ............................................................................. 10.09
(b) ............................................................................. 10.24
(c) (1) ............................................................................. 1.04, 4.04(10), 10.21,
12.01
(c) (2) ............................................................................. 1.04, 4.04(10), 10.21,
12.01
(c) (3) ............................................................................. Not Applicable
(d) ............................................................................. 10.24
(e) ............................................................................. 1.04
(S) 315 (a) ............................................................................. 6.01(a)
(b) ............................................................................. 6.02
(c) ............................................................................. 6.01(b)
(d) ............................................................................. 6.01(c)
(e) ............................................................................. 5.14
(S) 316 (a) (last sentence) ................................................................. 3.14
(a) (1) (A) ......................................................................... 5.12
(a) (1) (B) ......................................................................... 5.13
(a) (2) ............................................................................. Not Applicable
(b) ............................................................................. 5.08
(c) ............................................................................. Not Applicable
(S) 317 (a) (1) ............................................................................. 5.03
(a) (2) ............................................................................. 5.04
(b) ............................................................................. 10.03
(S) 318 (a) ............................................................................. 1.08
</TABLE>
<PAGE>
TABLE OF CONTENTS
Page
RECITALS 1
ARTICLE ONE. DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
Section 1.01. Definitions. 1
Section 1.02. Other Definitions. 18
Section 1.03. Rules of Construction. 18
Section 1.04. Form of Documents Delivered to Trustee. 19
Section 1.05. Acts of Holders. 19
Section 1.06. Notices, etc., to the Trustee and the Company. 20
Section 1.07. Notice to Holders; Waiver. 20
Section 1.08. Conflict with Trust Indenture Act. 20
Section 1.09. Effect of Headings and Table of Contents. 20
Section 1.10. Successors and Assigns. 21
Section 1.11. Separability Clause. 21
Section 1.12. Benefits of Indenture. 21
Section 1.13. Governing Law. 21
Section 1.14. No Recourse Against Others. 21
Section 1.15. Independence of Covenants. 21
Section 1.16. Exhibits and Schedules. 21
Section 1.17. Counterparts. 21
Section 1.18. Duplicate Originals. 22
ARTICLE TWO. FORM OF NOTES
Section 2.01. Form and Dating. 22
ARTICLE THREE. THE NOTES
Section 3.01. Title and Terms. 22
Section 3.02. Registrar and Paying Agent. 23
Section 3.03. Execution and Authentication. 23
Section 3.04. Temporary Notes. 24
Section 3.05. Transfer and Exchange. 25
Section 3.06. Mutilated, Destroyed, Lost and Stolen Notes. 25
Section 3.07. Payment of
Interest; Interest Rights Preserved. 26
Section 3.08. Persons Deemed Owners. 27
Section 3.09. Cancellation. 27
Section 3.10. Computation of Interest. 27
Section 3.11. Legal Holidays. 27
Section 3.12. CUSIP and CINS Numbers. 27
Section 3.13. Paying Agent To Hold Money in Trust. 28
Section 3.14. [Intentionally Omitted]. 28
Section 3.15. Deposits of Monies. 28
Section 3.16. Book-Entry Provisions for Global Notes. 28
Section 3.17. Special Transfer Provisions. 29
ARTICLE FOUR. DEFEASANCE OR COVENANT DEFEASANCE
Section 4.01. Company's Option To Effect Defeasance or Covenant
Defeasance. 31
Section 4.02. Defeasance and Discharge. 32
Section 4.03. Covenant Defeasance. 32
Section 4.04. Conditions to Defeasance or Covenant Defeasance. 32
Section 4.05. Deposited Money and Government Securities To Be
Held in Trust; Other Miscellaneous Provisins 34
Section 4.06. Reinstatement. 34
ARTICLE FIVE. REMEDIES
Section 5.01. Events of Default. 35
Section 5.02. Acceleration of Maturity, Rescission and Annulment. 36
ii
<PAGE>
Section 5.03. Collection of Indebtedness and Suits for Enforcement
by Trustee. 36
Section 5.04. Trustee May File Proofs of Claims. 37
Section 5.05. Trustee May Enforce Claims Without Possession of Notes. 37
Section 5.06. Application of Money Collected. 38
Section 5.07. Limitation on Suits. 38
Section 5.08. Unconditional Right of Holders To Receive Principal,
Premium and Interest 39
Section 5.09. Restoration of Rights and Remedies. 39
Section 5.10. Rights and Remedies Cumulative. 39
Section 5.11. Delay or Omission Not Waiver. 39
Section 5.12. Control by Majority. 39
Section 5.13. Waiver of Past Defaults. 40
Section 5.14. Undertaking for Costs. 40
Section 5.15. Waiver of Stay, Extension or Usury Laws. 40
ARTICLE SIX. THE TRUSTEE
Section 6.01. Certain Duties and Responsibilities. 40
Section 6.02. Notice of Defaults. 41
Section 6.03. Certain Rights of Trustee. 41
Section 6.04. Trustee Not Responsible for Recitals, Dispositions
of Notes or Application of Proceeds Thereof 42
Section 6.05. Trustee and Agents May Hold Notes; Collections; Etc. 42
Section 6.06. Money Held in Trust. 43
Section 6.07. Compensation and Indemnification of Trustee and Its
Prior Claim. 43
Section 6.08. Conflicting Interests. 43
Section 6.09. Corporate Trustee Required; Eligibility. 43
Section 6.10. Resignation
and Removal; Appointment of Successor Trustee. 43
Section 6.11. Acceptance of Appointment by Successor. 45
Section 6.12. Merger, Conversion, Amalgamation, Consolidation
or Succession to Business 45
ARTICLE SEVEN. HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY
Section 7.01. Preservation of Information; Company To Furnish
Trustee Names and Addresses of Holders 45
Section 7.02. Communications of Holders. 46
Section 7.03. Reports by Trustee. 46
ARTICLE EIGHT. CONSOLIDATION, MERGER, SALE OF ASSETS, ETC.
Section 8.01. Company May Consolidate, etc., Only on Certain Terms. 46
Section 8.02. Successor Substituted. 47
ARTICLE NINE. SUPPLEMENTAL INDENTURES AND WAIVERS
Section 9.01. Supplemental Indentures, Agreements and Waivers
Without Consent of Holders 47
Section 9.02. Supplemental Indentures, Agreements and Waivers
with Consent of Holders 48
Section 9.03. Execution of Supplemental Indentures, Agreements
and Waivers. 49
Section 9.04. Effect of Supplemental Indentures. 49
Section 9.05. Conformity with Trust Indenture Act. 49
Section 9.06. Reference in Notes to Supplemental Indentures. 49
Section 9.07. Record Date. 50
Section 9.08. Revocation and Effect of Consents. 50
ARTICLE TEN. COVENANTS
Section 10.01. Payment of Principal, Premium and Interest. 50
Section 10.02. Maintenance of Office or Agency. 50
Section 10.03. Money for Note Payments To Be Held in Trust. 51
Section 10.04. Corporate Existence. 52
Section 10.05. Payment of Taxes and Other Claims. 52
Section 10.06. Maintenance of Properties. 52
Section 10.07. Insurance. 52
Section 10.08. Books and Records. 53
iii
<PAGE>
Section 10.09. Provision of Commission Reports. 53
Section 10.10. Change of Control. 53
Section 10.11. Limitation on Additional Indebtedness. 55
Section 10.12. Statement by Officers as to Default. 55
Section 10.13. Limitation on Restricted Payments. 56
Section 10.14. Limitation on Transactions with Affiliates. 58
Section 10.15. Disposition of Proceeds of Asset Sales 59
Section 10.16. Limitation on Liens Securing Certain Indebtedness. 61
Section 10.17. Limitation on Status as Investment Company. 62
Section 10.18. Limitation on Issuances and Sales of Capital Stock
of Restricted Subsidiaries 62
Section 10.19. Limitation on Dividends and Other Payment
Restrictions Affecting Restricted Subsidiaries 62
Section 10.20. Limitation on Designations of Unrestricted Subsidiaries 63
Section 10.21. Compliance Certificates and Opinions. 64
Section 10.22. Limitation on Issuances of Guarantees by Restricted
Subsidiaries 64
Section 10.23. Registration Rights 64
Section 10.24. Intentionally Omitted. 65
Section 10.25. Business Activities. 65
Section 10.26. Limitation on Sale/Leaseback Transactions. 65
ARTICLE ELEVEN. SATISFACTION AND DISCHARGE
Section 11.01. Satisfaction and Discharge of Indenture. 66
Section 11.02. Application of Trust Money. 66
ARTICLE TWELVE. REDEMPTION
Section 12.01. Notices to the Trustee. 67
Section 12.02. Selection of Notes To Be Redeemed. 67
Section 12.03. Notice of Redemption. 67
Section 12.04. Effect of Notice of Redemption. 68
Section 12.05. Deposit of Redemption Price. 68
Section 12.06. Notes Redeemed or Purchased in Part. 68
EXHIBIT A-1 - Form of Rhythms NetConnections Inc. 14% Senior Notes
due 2010, Series A
EXHIBIT A-2 - Form of Rhythms NetConnections Inc. 14% Senior Notes
due 2010, Series B
EXHIBIT B - Form of Supplemental Indenture
EXHIBIT C - Form of Legend for Book-Entry Securities
EXHIBIT D - Form of Certificate To Be Delivered in Connection
with Transfers to Non-QIB Accredited Investors
EXHIBIT E - Form of Certificate To Be Delivered in Connection
with Transfers Pursuant to Regulation S
SCHEDULE A - Existing and Committed Indebtedness
iv
<PAGE>
INDENTURE
INDENTURE (this "Indenture"), dated as of February 23, 2000, between RHYTHMS
NETCONNECTIONS INC., a corporation incorporated under the laws of the State of
Delaware, as issuer (the "Company"), and STATE STREET BANK AND TRUST COMPANY OF
CALIFORNIA, N.A., a national banking association, as trustee (the "Trustee").
RECITALS
The Company has duly authorized the creation of an issue of (i) 14% Senior
Notes due 2010, Series A, and (ii) 14% Senior Notes due 2010, Series B, to be
issued in exchange for the 14% Senior Notes due 2010, Series A, pursuant to the
Registration Rights Agreement (as hereinafter defined) (collectively, the
"Notes"; such term to include the Initial Notes (as hereinafter defined) and the
Unrestricted Notes (as hereinafter defined), if any, including the Exchange
Notes (as hereinafter defined), if any, treated as a single class of securities
under this Indenture), of substantially the tenor and amount hereinafter set
forth, and to provide therefor the Company has duly authorized the execution and
delivery of this Indenture.
All things necessary have been done to make the Notes, when executed by the
Company, and authenticated and delivered hereunder and duly issued by the
Company, the valid obligations of the Company and to make this Indenture a valid
agreement of each of the Company and the Trustee in accordance with the terms
hereof.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of the Notes by
the Holders (as hereinafter defined) thereof, it is mutually covenanted and
agreed, for the equal and proportionate benefit of all Holders of the Notes, as
follows:
ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
Section 1.01. Definitions.
"1998 Notes" means the Company's 13 1/2% Senior Discount Notes due 2008.
"1998 Warrants" means the warrants issued in connection with the Company's
1998 Notes.
"1998 Warrant Agreement" means the Warrant Agreement dated May 5, 1998,
between the Company and State Street Bank and Trust Company of California, N.A.
"1999 Notes" means the Company's 12 3/4% Senior Notes due 2009.
"Acquired Indebtedness" means Indebtedness of a Person (i) assumed in
connection with an Asset Acquisition from such Person or (ii) existing at the
time such Person is merged or consolidated with or into the Company or any
Restricted Subsidiary or becomes a Restricted Subsidiary, in each case not
incurred in connection with, or in anticipation of, such Asset Acquisition or
merger or consolidation or such Person becoming a Restricted Subsidiary;
provided that Indebtedness of such Person which is redeemed, defeased, retired
or otherwise repaid at the time of or immediately upon consummation of such
Asset Acquisition or the transactions by which such Person is merged or
consolidated with or into the Company or any Restricted Subsidiary or becomes a
Restricted Subsidiary shall not constitute Acquired Indebtedness.
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"Affiliate" of any specified Person means (i) any other Person which,
directly or indirectly, controls, is controlled by or is under direct or
indirect common control with, the specified Person, (ii) any other Person that
owns, directly or indirectly, 10% or more of the specified Person's Voting Stock
or (iii) any executive officer or director of the specified Person; provided
that Donaldson, Lufkin & Jenrette, Inc. and its Affiliates shall not be deemed
to be Affiliates of the Company solely as a result of such entities holding the
1998 Notes, the 1998 Warrants or the Company's Common Stock (or any security
which is convertible into or exchangeable for any of the foregoing). For the
purposes of this definition, "control" when used with respect to any Person
means the power to direct the management and policies of such Person, directly
or indirectly, whether through the ownership of voting securities, by contract
or otherwise, and the terms "affiliated," "controlling" and "controlled" have
meanings correlative to the foregoing.
"Asset Acquisition" means (i) any capital contribution (by means of
transfers of cash or other property to others or payments for property or
services for the account or use of others, or otherwise) by the Company or any
Restricted Subsidiary in any other Person, or any acquisition or purchase of
Capital Stock of any other Person by the Company or any Restricted Subsidiary,
in either case pursuant to which such Person shall (a) become a Restricted
Subsidiary or (b) shall be merged or consolidated with or into the Company or
any Restricted Subsidiary or (ii) any acquisition by the Company or any
Restricted Subsidiary of the assets of any Person which constitute substantially
all of an operating unit or line of business of such Person or which is
otherwise outside of the ordinary course of business.
"Asset Sale" means any direct or indirect sale, conveyance, transfer
or lease (that has the effect of a disposition and is not for security purposes)
or other disposition (that is not for security purposes) (including by way of a
Sale/Leaseback Transaction) to any Person other than the Company or a Restricted
Subsidiary, in one transaction or a series of related transactions, of (i) any
Capital Stock of any Restricted Subsidiary, (ii) any assets of the Company or
any Restricted Subsidiary which constitute substantially all of an operating
unit or line of business of the Company and the Restricted Subsidiaries or (iii)
any other property or asset of the Company or any Restricted Subsidiary outside
of the ordinary course of business. For the purposes of this definition, the
term "Asset Sale" shall not include (i) any disposition of properties and assets
of the Company that is governed under Article Eight hereof, (ii) sales of
property or equipment that have become worn out, obsolete or damaged or
otherwise unsuitable for use in connection with the business of the Company or
any Restricted Subsidiary, as the case may be, and (iii) for purposes of Section
10.15 hereof, (a) sales, conveyances, transfers, leases or other dispositions of
property or assets, whether in one transaction or a series of related
transactions occurring within one year, involving assets with a Fair Market
Value not in excess of $500,000 in any 12 month period and (b) any asset of the
Company or a Restricted Subsidiary that is the subject of a Sale/Leaseback
Transaction with a Person (other than the Company or an Affiliate of the
Company) made in accordance with Section 10.26 hereof and that was acquired by
the Company or such Restricted Subsidiary no more than 120 days prior to the
transfer to a third party in a Sale/Leaseback Transaction.
"Attributable Debt" in respect of a Sale/Leaseback Transaction means,
as at the time of determination, the present value (discounted at the interest
rate implicit in the terms of the lease included in such Sale/Leaseback
Transaction) of the total obligations of the lessee for rental payments during
the remaining term of the lease included in such Sale/Leaseback Transaction
(including any period for which such lease has been extended).
"Average Life to Stated Maturity" means, with respect to any
Indebtedness, as at any date of determination, the quotient obtained by dividing
(i) the sum of the products of (a) the number of years from such date to the
date or dates of each successive scheduled principal payment (including, without
limitation, any sinking fund requirements) of such Indebtedness multiplied by
(b) the amount of each such principal payment by (ii) the sum of all such
principal payments; provided that, in the case of any Capitalized Lease
Obligation, all calculations hereunder shall give effect to any applicable
options to renew in favor of the Company or any Restricted Subsidiary.
"Bankruptcy Law" means Title 11, United States Code or any similar
federal, state or foreign law relating to bankruptcy, insolvency, receivership,
winding-up, liquidation, reorganization or relief of debtors.
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"Bankruptcy Order" means any binding court order made in a proceeding
pursuant to or within the meaning of any Bankruptcy Law, containing an
adjudication of bankruptcy or insolvency, or providing for liquidation,
receivership, winding-up, dissolution or reorganization, or appointing a
Custodian of a debtor or of all or any substantial part of a debtor's property,
or providing for the staying, arrangement, adjustment or composition of
indebtedness or other relief of a debtor.
"Board" means the Board of Directors of the Company.
"Board Resolution" means a copy of a resolution certified by the
Secretary or an Assistant Secretary of the Company to have been duly adopted by
the Board and to be in full force and effect on the date of such certification,
and delivered to the Trustee.
"Borrowing Base" means, as of any date, an amount equal to 85% of the
book value of the accounts, loans and other receivables (before giving effect to
any related allowances and reserves) as shown on the Company's most recent
consolidated balance sheet determined in accordance with GAAP not more than 90
days past due.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and
Friday which is not a day on which banking institutions in The City of New York,
New York, or the city in which the Corporate Trust Office of the Trustee is
located, are authorized or obligated by law, regulation or executive order to
close.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations, rights in, or other equivalents (however designated
and whether voting and/or non-voting) of, such Person's capital stock, including
Preferred Stock, whether outstanding on the Issue Date or issued after the Issue
Date, and any and all rights (other than any evidence of Indebtedness), warrants
or options exchangeable for or convertible into such capital stock.
"Capitalized Lease Obligation" means any obligation to pay rent or
other amounts under a lease of (or other agreement conveying the right to use)
any property (whether real, personal or mixed, immovable or movable) that is
required to be classified and accounted for as a capitalized lease obligation
under GAAP, and for the purpose of this Indenture, the amount of such obligation
at any date shall be the capitalized amount thereof at such date, determined in
accordance with GAAP.
"Cash Equivalents" means (i) any evidence of Indebtedness which
matures 365 days or less from the date of purchase or acquisition issued or
directly and fully guaranteed or insured by the United States Government or any
agency or instrumentality thereof (provided that the full faith and credit of
the United States Government is pledged in support thereof or such Indebtedness
constitutes a general obligation of such country); (ii) deposits, certificates
of deposit or acceptances with a maturity of 365 days or less of any financial
institution that is a member of the Federal Reserve System, in each case having
combined capital and surplus and undivided profits (or any similar capital
concept) of not less than $500.0 million and whose senior unsecured debt is
rated at least "A-l" by S&P or "P-l" by Moody's; (iii) commercial paper with a
maturity of 365 days or less issued by a corporation (other than an Affiliate of
the Company) organized under the laws of the United States or any State thereof
and rated at least "A-l" by S&P or "P-1" by Moody's; (iv) repurchase agreements
and reverse repurchase agreements relating to marketable direct obligations
issued or unconditionally guaranteed by the United States Government or issued
by any agency thereof and backed by the full faith and credit of the United
States Government maturing within 365 days from the date of acquisition; and (v)
money market funds in the United States which invest substantially all of their
assets in securities of the type described in any of the preceding clauses (i)
through (iv).
"Cedel" means Cedel Bank, Societe Anonyme.
"Change of Control" means the occurrence of any of the following
events: (a) any "person" or "group" (as such terms are used in Sections 13(d) or
14(d) of the Exchange Act), excluding Permitted Holders, is or
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becomes the "beneficial owner" (as defined in Rules 13d-3 or 13d-5 under the
Exchange Act, except that a person shall be deemed to have "beneficial
ownership" of all securities that such person has or acquires the right to
acquire, whether such right is exercisable immediately or only after the passage
of time), directly or indirectly, of more than 50% of the total voting power of
all Voting Stock of the Company (except that the person or group shall not be
deemed the "beneficial owner" of shares tendered pursuant to a tender or
exchange offer made by that person or group or any of their Affiliates until the
tendered shares are accepted for purchase or exchange) or has, directly or
indirectly, the right to elect or designate a majority of the Board or (b) the
Company consolidates with, or merges with or into, another person or sells,
assigns, conveys, transfers, leases or otherwise disposes of all or
substantially all of its assets to any person, or any person consolidates with,
or merges with or into, the Company, in any such event pursuant to a transaction
in which the outstanding Voting Stock of the Company is converted into or
exchanged for cash, securities or other property, other than any such
transaction where (i) the outstanding Voting Stock of the Company is converted
into or exchanged for (1) Voting Stock (other than Disqualified Stock) of the
surviving or transferee corporation or its parent corporation and/or (2) cash,
securities and other property in any amount which could be paid by the Company
as a Restricted Payment under this Indenture, (ii) the "beneficial owners" (as
so defined) of the Voting Stock of the Company immediately before such
transaction own, directly or indirectly, immediately after such transaction, at
least a majority of the voting power of all Voting Stock of the surviving or
transferee corporation or its parent corporation immediately after such
transaction, as applicable, or (iii) immediately after such transaction, no
"person" or "group" (as such terms are defined above), excluding the Permitted
Holders, is the "beneficial owner" (as defined above), directly or indirectly,
of more than 50% of the Voting Stock of such surviving or transferee corporation
or its parent corporation, as applicable, or has, directly or indirectly, the
right to elect or designate a majority of the board of directors of the
surviving or transferee corporation or its parent corporation, as applicable, or
(c) during any consecutive two-year period, individuals who at the beginning of
such period constituted the Board (together with any new directors whose
election by the Board or whose nomination for election by the stockholders of
the Company was approved by a vote of a majority of the directors then still in
office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved) cease for any
reason to constitute a majority of the Board then in office. The good faith
determination by the Board, based upon advice of outside counsel, of the
beneficial ownership of securities of the Company within the meaning of Rules
13d-3 or 13d-5 under the Exchange Act shall be conclusive, absent contrary
controlling precedent or contrary written interpretation published by the
Commission. No inference shall be created that officers or employees of the
Company are acting as a "person" or "group" (as such terms are used in Sections
13(d) or 14(d) of the Exchange Act) with the power to designate a majority of
the members of the Board solely because such officers or employees constitute a
majority of the members of the Board.
"Closing Time" has the meaning specified in the Purchase Agreement.
"Commission" means the United States Securities and Exchange
Commission, or any successor agency.
"Common Stock" means, with respect to any Person, any and all shares,
interests, participations or rights in, or other equivalents (however designated
and whether voting and/or non-voting) of, such Person's common stock and
includes, without limitation, all series and classes of such common stock.
"Company" means the Person named as the "Company" in the first
paragraph of this Indenture, until a successor Person shall have replaced such
Person pursuant to the applicable provisions of this Indenture, and thereafter
"Company" shall mean such successor Person.
"Company Request" or "Company Order" means a written request or order
signed in the name of the Company by any one of its Chairman of the Board, its
Vice-Chairman, its Chief Executive Officer, its President or a Vice President,
and by its Secretary or an Assistant Secretary or the Treasurer or an Assistant
Treasurer, and delivered to the Trustee.
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"Consolidated Income Tax Expense" means, with respect to any period,
the provision for federal, state, local, foreign and other income taxes of the
Company and the Restricted Subsidiaries for such period as determined on a
consolidated basis in accordance with GAAP.
"Consolidated Interest Expense" means, with respect to any period,
without duplication, the sum of (i) the interest expense of the Company and the
Restricted Subsidiaries for such period as determined on a consolidated basis in
accordance with GAAP, including, without limitation, (a) any amortization of
debt discount, (b) the net cost under Interest Rate Obligations (including any
amortization of discounts), (c) the interest portion of any deferred payment
obligation, (d) all commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers' acceptance financing and similar
transactions and (e) all capitalized interest and accrued interest, (ii) the
interest component of Capitalized Lease Obligations paid, accrued and/or
scheduled to be paid or accrued by the Company and the Restricted Subsidiaries
during such period as determined on a consolidated basis in accordance with
GAAP, (iii) the portion of any rental obligation in respect of any
Sale/Leaseback Transaction allocable to interest expense (determined as if such
were treated as a Capital Lease Obligation), and (iv) the amount of dividends
and distributions in respect of Preferred Stock or Disqualified Stock paid by
the Restricted Subsidiaries to a Person other than the Company or a Restricted
Subsidiary or by the Company during such period.
"Consolidated Net Income" means, with respect to any period, the net
income (or loss) of the Company and the Restricted Subsidiaries for such period
determined on a consolidated basis in accordance with GAAP, adjusted, to the
extent included in calculating such consolidated net income (or loss), by
excluding, without duplication, (i) all extraordinary, unusual or nonrecurring
gains or losses and all gains or losses from sales or other dispositions of
assets (including Asset Sales) out of the ordinary course of business (net of
taxes, fees and expenses relating to the transaction giving rise thereto) for
such period, (ii) that portion of such net income (or loss) derived from or in
respect of Investments in Persons other than Restricted Subsidiaries, except to
the extent of any cash dividends actually received by the Company or any
Restricted Subsidiary (subject, in the case of any Restricted Subsidiary, to the
provisions of clause (vi) of this definition), (iii) any gain or loss, net of
taxes, realized upon the termination of any employee pension benefit plan during
such period, (iv) that portion of such net income (or loss) allocable to
minority interests in any Restricted Subsidiary for such period, (v) net income
(or loss) of any other Person combined with the Company or any Restricted
Subsidiary on a "pooling of interests" basis attributable to any period prior to
the date of combination and (vi) the net income of any Restricted Subsidiary for
such period to the extent that the declaration of dividends or similar
distributions by that Restricted Subsidiary of that income is not at the time
permitted, directly or indirectly, by operation of the terms of its charter or
any agreement, instrument, judgment, decree, order, statute, rule or
governmental regulations applicable to that Restricted Subsidiary or its
stockholders.
"Consolidated Net Worth" means, with respect to any Person, the
consolidated stockholders' or partners' equity of such Person reflected on the
most recent balance sheet of such Person, determined in accordance with GAAP,
less any amounts attributable to redeemable capital stock (as determined under
applicable accounting standards promulgated by the Commission) of such Person.
"Consolidated Operating Cash Flow" means, with respect to any period,
Consolidated Net Income for such period (a) increased (without duplication), to
the extent deducted in arriving at such Consolidated Net Income, by the sum of
(i) Consolidated Income Tax Expense for such period; (ii) Consolidated Interest
Expense for such period; and (iii) depreciation, amortization and any other non-
cash items for such period of the Company and the Restricted Subsidiaries (other
than any non-cash item which requires the accrual of, or a reserve for, cash
charges for any future period), including, without limitation, amortization of
capitalized debt issuance costs for such period, all determined on a
consolidated basis in accordance with GAAP, and (b) decreased by any non-cash
items (including non-recurring gains and non-recurring items of income) to the
extent they increased Consolidated Net Income for such period (including any
partial or complete reversal of reserves taken in a prior period).
"Corporate Trust Office" means the office of the Trustee at which at
any particular time the trust created by this Indenture shall be principally
administered, which office at the date of execution of this Indenture is
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located at Library Tower, 633 West 5th Street, Twelfth Floor, Los Angeles,
California 90071, Attention: Corporate Trust Department, except for purposes of
Sections 3.02 and 10.02 hereof. For purposes of such Sections, such office is
located at the office of State Street Bank and Trust Company, N.A., 61 Broadway,
15th Floor, New York, New York 10006.
"Custodian" means any receiver, interim receiver, receiver and
manager, receiver-manager, trustee, assignee, liquidator, sequestrator or
similar official under any Bankruptcy Law or any other Person with like powers
whether appointed judicially or out of court and whether pursuant to an interim
or final appointment.
"Debt Securities" means any debt securities issued by the Company in a
public offering or in a private placement to institutional "accredited
investors" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities
Act).
"Default" means any event that is, or after notice or passage of time
or both would be, an Event of Default.
"Default Amount" means the principal amount of the Notes (and any
applicable premium thereon) and any accrued and unpaid interest thereon.
"Depository" means The Depository Trust Company, its nominees and
their respective successors until a successor Depositary shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Depositary" shall mean or include each Person who is then a Depositary
hereunder.
"Disinterested Director" means, with respect to any transaction or
series of related transactions, a member of the Board other than a director who
(i) has any material direct or indirect financial interest in or with respect to
such transaction or series of related transactions or (ii) is an employee or
officer of the Company or an Affiliate that is itself a party to such
transaction or series of transactions or an Affiliate of a party to such
transaction or series of related transactions.
"Disqualified Stock" means, with respect to any Person, any Capital
Stock which, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any
event, matures or becomes mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or becomes exchangeable for Indebtedness at the option
of the holder thereof, or becomes redeemable at the option of the holder
thereof, in whole or in part, on or prior to the final maturity date of the
Notes; provided that any Capital Stock that would not constitute Disqualified
Stock but for provisions thereof giving holders thereof the right to require
such Person to repurchase or redeem such Capital Stock upon the occurrence of an
"asset sale" or "change of control" occurring prior to the final maturity date
of the Notes will not constitute Disqualified Stock so long as the "asset sale"
or "change of control" provisions applicable to such Capital Stock are no more
favorable to the holders thereof than Sections 10.10 and 10.15 hereof and such
Capital Stock specifically provides that such Person will not repurchase or
redeem any such stock pursuant to such provision prior to the Company's
repurchase of such Notes as are required to be repurchased pursuant to Sections
10.10 and 10.15 hereof.
"Euroclear" means Morgan Guaranty Trust Company of New York, Brussels
Office, as operator of the Euroclear System.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated by the Commission thereunder.
"Exchange Notes" means the 14% Senior Notes due 2010, Series B, of the
Company, to be issued in exchange for the Initial Notes pursuant to the
Registration Rights Agreement.
"Exchange Offer" shall have the meaning specified in the Registration
Rights Agreement.
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"Fair Market Value" means, with respect to any asset or property, the
price (after taking into account any liabilities relating to such asset or
property) that could be negotiated in an arms-length free market transaction,
for cash, between a willing seller and a willing buyer, neither of whom is under
pressure or compulsion to complete the transaction. Unless otherwise specified
in the Indenture, Fair Market Value shall be determined by the Board acting in
good faith and shall be evidenced by a Board Resolution.
"GAAP" means, as of any date of determination, generally accepted
accounting principles set forth in the opinions and pronouncements of the
Accounting Principles Board of the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial Accounting
Standards Board, the Commission or in such other statements by such other entity
as may be approved by a significant segment of the accounting profession of the
United States, which are in effect as of such date of determination and which
are consistently applied for all applicable periods.
"Global Notes" means one or more Regulation S Global Notes and 144A
Global Notes.
"Government Securities" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which obligations
or guarantee the full faith and credit of the United States is pledged.
"Guarantee" means, as applied to any obligation, (i) a guarantee
(other than by endorsement of negotiable instruments for collection in the
ordinary course of business), direct or indirect, in any manner, of any part or
all of such obligation and (ii) an agreement, direct or indirect, contingent or
otherwise, the practical effect of which is to assure in any way the payment or
performance (or payment of damages in the event of non-performance) of all or
any part of such obligation, including, without limiting the foregoing, any
obligation (A) to pay amounts drawn down by letters of credit, (B) to purchase
or pay (or advance or supply funds for the purchase or payment of) such
obligation (whether arising by virtue of partnership arrangement, agreements to
keep-well, to purchase assets, goods, securities or services, to take-or-pay, or
to maintain financial statement conditions or otherwise) or (C) entered into for
purposes of assuring in any other manner the obligee of such obligation of the
payment thereof or to protect such obligee against loss in respect thereof (in
whole or in part); provided that the term "Guarantee" shall not include
endorsements for collection or deposit in the ordinary course of business. The
term "Guarantee" used as a verb has a corresponding meaning.
"Holder" means a Person in whose name a Note is registered in the Note
Register.
"Indebtedness" means, with respect to any Person, without duplication
(whether or not the recourse of the lender is to the whole of the assets of such
Person or only to a portion thereof), (i) every liability of such Person,
whether or not contingent, (A) for borrowed money, (B) evidenced by notes,
bonds, debenture or other similar instruments (whether or not negotiable), (C)
for reimbursement of amounts expended under letters of credit, bankers'
acceptances or similar facilities issued for the account of such Person, (D)
issued or assumed as the deferred purchase price of property or services, (E)
relating to a Capitalized Lease Obligation and all Attributable Debt in respect
of Sale/Leaseback Transactions of such Person and (F) in respect of an Interest
Rate Obligation of such Person; (ii) every liability of others of the kind
described in the preceding clause (i) which such Person has Guaranteed or which
is otherwise its legal liability; or (iii) every obligation secured by a Lien
(other than (x) Permitted Liens of the types described in clauses (b), (d) or
(e) of the definition of Permitted Liens; provided that the obligations secured
would not constitute Indebtedness under clauses (i) or (ii) or (iii) of this
definition, and (y) Liens on Capital Stock or Indebtedness of any Unrestricted
Subsidiary) to which the property or assets of such Person are subject, whether
or not the obligations secured thereby shall have been assumed by or shall
otherwise be such Person's legal liability (the amount of such obligation being
deemed to be the lesser of the Fair Market Value of such property or asset or
the amount of the obligation so secured); (iv) all Disqualified Stock of such
Person, valued at the greater of its voluntary or involuntary maximum fixed
repurchase or redemption price (plus accrued and unpaid dividends to the date of
determination); and (v) any and all deferrals, renewals, extensions and
refundings of, or amendments, modifications or supplements to, any liability of
the kind described in any of the preceding clauses
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(i), (ii), (iii) or (iv). In no event shall "Indebtedness" include trade
payables and accrued liabilities that are current liabilities incurred in the
ordinary course of business, excluding the current maturity of any obligation
which would otherwise constitute Indebtedness. For purposes of Section 10.11 and
Section 10.13 hereof and the definition of "Events of Default," in determining
the principal amount of any Indebtedness to be incurred by the Company or a
Restricted Subsidiary or which is outstanding at any date, (A) the principal
amount of any Indebtedness which provides that an amount less than the principal
amount at maturity thereof shall be due upon any declaration of acceleration
thereof shall be the accreted value thereof at the date of determination; (B)
the principal amount of any Indebtedness shall be reduced by any amount of cash,
Government Securities or Cash Equivalent collateral securing on a perfected
basis, and dedicated for disbursement to the payment of principal of or interest
on, such Indebtedness; and (C) the amount of Indebtedness of any Person at any
date shall be the outstanding balance at such date of all unconditional
obligations as described above and the maximum liability of any Guarantees at
such date.
"Indebtedness to EBITDA Ratio" means, as at any date of determination
(the "Transaction Date"), the ratio of (i) Total Consolidated Indebtedness as at
the Transaction Date to (ii) two times the Consolidated Operating Cash Flow for
the two full fiscal quarters immediately preceding the Transaction Date for
which financial statements are available (such two full fiscal quarter period
being referred to herein as the "Measurement Period"). For purposes of
calculating Consolidated Operating Cash Flow for the relevant Measurement Period
prior to a Transaction Date, (A) any Person that is a Restricted Subsidiary on
the Transaction Date (or would become a Restricted Subsidiary on such
Transaction Date in connection with the transaction that requires the
calculation of such Consolidated Operating Cash Flow) shall be deemed to have
been a Restricted Subsidiary at all times during the Measurement Period, (B) any
Person that is not a Restricted Subsidiary on such Transaction Date (or would
cease to be a Restricted Subsidiary on such Transaction Date in connection with
the transaction that requires the calculation of Consolidated Operating Cash
Flow) will be deemed not to have been a Restricted Subsidiary at any time during
the Measurement Period, and (C) if the Company or any Restricted Subsidiary
shall have in any manner (x) acquired through an Asset Acquisition or (y)
disposed of (including by way of an Asset Sale or the termination or
discontinuance of activities constituting such operating business) any operating
business during such Measurement Period or after the end of such period and on
or prior to the Transaction Date, such calculation will be made on a pro forma
basis in accordance with GAAP as if, in the case of an Asset Acquisition, such
transaction had been consummated on the first day of the Measurement Period and,
in the case of an Asset Sale or other disposition, termination or discontinuance
of activities constituting such an operating business, such transaction had been
consummated prior to the first day of the Measurement Period; provided, however
that such pro forma adjustment shall not give effect to the operating cash flow
of any Person that would become a Restricted Subsidiary on the Transaction Date
in connection with the transaction that requires the calculation of
Consolidated Operating Cash Flow to the extent that such Person's net income
would be excluded from the calculation of Consolidated Net Income pursuant to
clause (vi) of the definition of Consolidated Net Income.
"Indenture" means this instrument as originally executed (including
all exhibits and schedules hereto) and as it may from time to time be
supplemented or amended by one or more indentures supplemental hereto entered
into pursuant to the applicable provisions hereof.
"Indenture Obligations" means the obligations of the Company and any
other obligor under this Indenture or under the Notes, to pay principal of,
premium, if any, and interest on the Notes when due and payable, whether at
maturity, by acceleration, call for redemption or repurchase or otherwise, and
all other amounts due or to become due under or in connection with this
Indenture or the Notes and the performance of all other obligations to the
Trustee (including, but not limited to, payment of all amounts due the Trustee
under Section 6.07 hereof) and the Holders of the Notes under this Indenture and
the Notes, according to the terms thereof.
"Independent Financial Advisor" means a United States investment
banking firm of national or regional standing in the United States (i) which
does not, and whose directors, officers and employees or Affiliates do not have,
a direct or indirect financial interest in the Company and (ii) which, in the
judgment of the Board, is otherwise independent and qualified to perform the
task for which it is to be engaged.
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"Initial Notes" means the 14% Senior Notes due 2010, Series A, of the
Company.
"Initial Purchasers" means Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Salomon Smith Barney Inc., Chase Securities Inc. and Credit Suisse
First Boston Corporation.
"Institutional Accredited Investor" means an institution that is an
"accredited investor" as that term is defined in Rule 501(a)(1), (2), (3) or (7)
under the Securities Act.
"interest" means, when used with respect to any Note, the amount of
all interest accruing on such Note, including all additional interest payable on
the Notes pursuant to the Registration Rights Agreement and all interest
accruing subsequent to the occurrence of any events specified in Sections
5.01(vii), (viii) and (ix) hereof or which would have accrued but for any such
event, whether or not such claims are allowable under applicable law.
"Interest Payment Date" means, when used with respect to any Note, the
Stated Maturity of an installment of cash interest on such Note, as set forth in
such Note.
"Interest Rate Obligations" means the obligations of any Person
pursuant to any arrangement with any other Person whereby, directly or
indirectly, such Person is entitled to receive from time to time periodic
payments calculated by applying either a floating or a fixed rate of interest on
a stated notional amount and shall include, without limitation, interest rate
swaps, caps, floors, collars, forward interest rate agreements and similar
agreements.
"Investment" means, with respect to any Person, any direct or indirect
advance, loan, account receivable (other than an account receivable arising in
the ordinary course of business), or other extension of credit (including,
without limitation, by means of any Guarantee) or any capital contribution to
(by means of transfers of cash or other property or assets to others, payments
for property or services for the account or use of others, or otherwise), or any
purchase or acquisition of capital stock, bonds, notes, debentures or other
securities or evidences of Indebtedness of any other Person. The amount of any
Investment shall be the original cost of such Investment, plus the cost of all
additions thereto, and minus the amount of any portion of such Investment repaid
to such Person in cash as a repayment of principal or a return of capital, as
the case may be, but without any other adjustments for increases or decreases in
value, or write-ups, write-downs or write-offs with respect to such Investment.
In determining the amount of any Investment involving a transfer of any property
or assets other than cash, such property shall be valued at its Fair Market
Value at the time of transfer.
"Issue Date" means the original date of issuance of the Notes.
"Lien" means any mortgage, charge, pledge, lien (statutory or other),
security interest, hypothecation, assignment for security, claim, or preference
or priority or other encumbrance upon or with respect to any property of any
kind whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction). A
Person shall be deemed to own subject to a Lien any property which such Person
has acquired or holds subject to the interest of a vendor or lessor under any
conditional sale agreement, capital lease or other title retention agreement.
"Market Capitalization" of any Person means, as of any day of
determination, the product of (i) the average Closing Price of a share of such
Person's Common Stock over the 20 consecutive trading days immediately preceding
such date and (ii) the number of shares of such Common Stock issued and
outstanding on such date. "Closing Price" on any trading day with respect to
the per share price of any shares of Common Stock means the last reported sale
price regular way or, in case no such reported sale takes place on such day, the
average of the reported closing bid and asked prices regular way, in either case
on the New York Stock Exchange or, if such shares of Common Stock are not listed
or admitted to trading on such exchange, on the principal national securities
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exchange on which such shares are listed or admitted to trading or, if not
listed or admitted to trading on any national securities exchange, on the Nasdaq
National Market or, if such shares are not listed or admitted to trading on any
national securities exchange or quoted on The Nasdaq National Market but such
Person is a "Foreign Issuer" (as defined in Rule 3b-4(b) under the Exchange Act)
and the principal securities exchange on which such shares are listed or
admitted to trading is a "designated offshore securities market" (as defined in
Rule 902(b) under the Securities Act), the average of the reported closing bid
and asked prices regular way on such principal exchange or, if such shares are
not listed or admitted to trading on any national securities exchange or quoted
on the Nasdaq National Market and such Person and any securities markets in
which such Person's Common Stock trades does not meet any of the foregoing such
requirements, the average of the closing bid and asked prices in the over-the-
counter market as furnished by any New York Stock Exchange member firm that is
selected from time to time by the Company for the purpose and is reasonably
acceptable to the Trustee.
"Maturity Date" means, with respect to any Note, the date specified in
such Note as the fixed date on which the principal of such Note is due and
payable.
"Moody's" means Moody's Investors Service, Inc. (and any successor).
"Net Cash Proceeds" means, with respect to any Asset Sale, the
proceeds thereof received by the Company or any Restricted Subsidiary in the
form of cash (including assumed Indebtedness (other than Subordinated
Indebtedness) and other items deemed to be cash under the proviso to the first
sentence of Section 10.15 hereof) or Cash Equivalents including payments in
respect of deferred payment obligations when received in the form of cash or
Cash Equivalents (except to the extent that such obligations are financed or
sold with recourse to the Company or any Restricted Subsidiary) net of (i)
brokerage commissions and other fees, costs and expenses (including fees and
expenses of legal counsel and investment bankers) related to such Asset Sale,
(ii) provisions for all taxes paid or payable as a result of such Asset Sale,
(iii) amounts required to be paid to any Person (other than the Company or any
Restricted Subsidiary) owning a beneficial interest in or having a Lien on the
assets subject to the Asset Sale, (iv) with respect to Asset Sales by Restricted
Subsidiaries, the portion of such cash and Cash Equivalents attributable to any
Persons holding a minority interest in such Restricted Subsidiary and (v)
appropriate amounts to be provided by the Company or any Restricted Subsidiary,
as the case may be, as a reserve required in accordance with GAAP against any
liabilities associated with such Asset Sale and retained by the Company or any
Restricted Subsidiary, as the case may be, after such Asset Sale, including,
without limitation, pension and other post-employment benefit liabilities,
liabilities related to environmental matters and liabilities under any
indemnification obligations associated with such Asset Sale, all as reflected in
an Officers' Certificate delivered to the Trustee.
"Non-U.S. Person" means any Person that is not a U.S. Person, as such
term is defined in Regulation S.
"Notes" shall have the meaning specified in the recitals of this
Indenture.
"Offering Memorandum" means the Offering Memorandum of the Company,
dated February 16, 2000, pursuant to which the Initial Notes were offered, and
any supplement thereto.
"Officer" means, with respect to the Company, the Chairman of the
Board, a Vice Chairman, the President, a Vice President, the Secretary, an
Assistant Secretary, the Treasurer or an Assistant Treasurer.
"Officers' Certificate" means, with respect to the Company, a
certificate signed by the Chairman of the Board, a Vice Chairman, the President
or a Vice President, and by the Secretary, an Assistant Secretary, the Treasurer
or an Assistant Treasurer, of the Company and delivered to the Trustee.
"144A Global Note" means a permanent global note in registered form
representing the aggregate principal amount of Notes sold in reliance on Rule
144A.
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"Opinion of Counsel" means a written opinion of legal counsel who may
be counsel for the Company, the Trustee or any Subsidiary Guarantor, as
applicable, and who shall be reasonably acceptable to the Trustee.
"Outstanding" means, as of the date of determination, all Notes
theretofore authenticated and delivered under this Indenture, except:
(i) Notes theretofore canceled by the Trustee or delivered to the
Trustee for cancellation;
(ii) Notes, or portions thereof, for whose payment or redemption
money in the necessary amount has been theretofore deposited with the Trustee or
any Paying Agent (other than the Company or any Affiliate thereof) in trust or
set aside and segregated in trust by the Company or any Affiliate thereof (if
the Company or such Affiliate shall act as Paying Agent) for the Holders of such
Notes; provided, however, that if such Notes are to be redeemed, notice of such
redemption has been duly given pursuant to this Indenture or provision therefor
satisfactory to the Trustee has been made;
(iii) Notes with respect to which the Company has effected defeasance
or covenant defeasance as provided in Article Four, to the extent provided in
Sections 4.02 and 4.03 hereof; and
(iv) Notes in exchange for or in lieu of which other Notes have been
authenticated and delivered pursuant to this Indenture, other than any such
Notes in respect of which there shall have been presented to the Trustee proof
satisfactory to it that such Notes are held by a bona fide purchaser in whose
hands the Notes are valid obligations of the Company;
provided, however, that in determining whether the Holders of the requisite
aggregate principal amount of Outstanding Notes have given any request, demand,
authorization, direction, notice, consent or waiver hereunder, Notes owned by
the Company, any other obligor upon the Notes or any Affiliate of the Company or
such other obligor shall be disregarded and deemed not to be Outstanding, except
that, in determining whether the Trustee shall be protected in relying upon any
such request, demand, authorization, direction, notice, consent or waiver, only
Notes that a Responsible Officer of the Trustee knows to be so owned shall be so
disregarded. The Company shall notify the Trustee, in writing, when it
purchases or otherwise acquires Notes, of the aggregate principal amount of such
Notes so purchased or otherwise acquired; provided that any failure on the part
of the Company to provide the aforesaid notice to the Trustee shall not
constitute a Default under this Indenture. Notes so owned which have been
pledged in good faith may be regarded as Outstanding if the pledgee establishes
to the satisfaction of the Trustee the pledgee's right so to act with respect to
such Notes and that the pledgee is not the Company or any other obligor upon the
Notes or any Affiliate of the Company or such other obligor. If the Paying
Agent holds, in its capacity as such, on any Maturity Date or on any optional
redemption date money sufficient to pay all accrued interest and principal with
respect to such Notes payable on that date and is not prohibited from paying
such money to the Holders thereof pursuant to the terms of this Indenture, then
on and after that date such Notes cease to be Outstanding and interest on them
ceases to accrue. Notes may also cease to be outstanding to the extent
expressly provided in Article Four.
"Permitted Business" means any of the following: (i) transmitting,
providing services relating to or developing network and software applications
for the transmission and management of voice, data, video or other information
through owned or leased wireline or wireless transmission facilities or over the
internet; (ii) creating, developing, constructing, installing, integrating,
repairing, maintaining or marketing communications-related systems, network
equipment and wireless and wireline transmission facilities, software and other
related products; and (iii) evaluating, owning, operating, participating in or
pursuing any other business that is primarily related to those identified in the
foregoing clauses (i) and (ii).
"Permitted Business Investments" means an Investment in any Person the
primary business of which consists of a Permitted Business.
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"Permitted Credit Facility" means any senior secured or unsecured
commercial term loan and/or revolving credit facilities (including any letter of
credit subfacility) entered into principally with commercial banks and/or other
financial institutions.
"Permitted Holders" means Brentwood Venture Capital, Enterprise
Partners, Kleiner Perkins Caulfield & Byers, The Sprout Group and Catherine M.
Hapka, and their respective Affiliates.
"Permitted Indebtedness" means the following Indebtedness (each of
which shall be given independent effect):
(a) Indebtedness under the Notes and the Indenture;
(b) Indebtedness (including Disqualified Stock) of the Company and/or
any Restricted Subsidiary outstanding, or committed but undrawn, on the
Issue Date and identified on Schedule A to this Indenture (including any
increase in the accreted value thereof after the Issue Date pursuant to the
terms of the instrument governing such Indebtedness as of the Issue Date);
(c) (i) Indebtedness of any Restricted Subsidiary owed to and held by
the Company or a Wholly Owned Restricted Subsidiary and (ii) Indebtedness
of the Company, which is not secured by any Lien and is subordinated to the
Company's obligations with respect to the Notes, owed to and held by any
Restricted Subsidiary; provided that an incurrence of Indebtedness shall be
deemed to have occurred upon (x) any sale or other disposition of any
Indebtedness of the Company or a Restricted Subsidiary referred to in this
clause (c) to a Person other than the Company or a Restricted Subsidiary,
(y) any sale or other disposition of Capital Stock of a Restricted
Subsidiary which holds Indebtedness of the Company or another Restricted
Subsidiary such that such Restricted Subsidiary ceases to be a Restricted
Subsidiary or (z) the Designation of a Restricted Subsidiary which holds
Indebtedness of the Company or another Restricted Subsidiary as an
Unrestricted Subsidiary;
(d) Interest Rate Obligations of the Company and/or any Restricted
Subsidiary relating to Indebtedness of the Company and/or such Restricted
Subsidiary, as the case may be (which Indebtedness (i) bears interest at
fluctuating interest rates and (ii) is otherwise permitted to be incurred
under Section 10.11 hereof), but only to the extent that the notional
amount of such Interest Rate Obligations does not exceed the principal
amount of the Indebtedness (and/or Indebtedness subject to commitments) to
which such Interest Rate Obligations relate;
(e) Indebtedness of the Company and/or any Restricted Subsidiary in
respect of performance bonds of the Company or any Restricted Subsidiary or
surety bonds provided by the Company or any Restricted Subsidiary, in each
case incurred in the ordinary course of business;
(f) Indebtedness of the Company and/or any Restricted Subsidiary to
the extent it represents a replacement, renewal, refinancing or extension
(a "refinancing") of the Notes (during the periods for which redemption is
permitted under the terms of the Indenture) or other outstanding
Indebtedness of the Company and/or of any Restricted Subsidiary incurred or
outstanding pursuant to clause (a), (b), (g) or (h) of this definition or
the proviso in the first paragraph of Section 10.11 hereof; provided that
(i) no Restricted Subsidiary may incur Indebtedness to refinance
Indebtedness of the Company (except for Guarantees issued in accordance
with Section 10.22 hereof); (ii) if such Indebtedness being refinanced has
an Average Life to Stated Maturity equal to or longer than the Average Life
to Stated Maturity of the Notes, any such refinancing shall have an Average
Life to Stated Maturity longer than the Average Life to Stated Maturity of
the Notes and a final stated maturity for the payment of principal thereof
later than the final stated maturity of the Notes; (iii) if such
Indebtedness being refinanced has an Average Life to Stated Maturity
shorter than the Average Life to Stated Maturity of the Notes, any such
refinancing shall have an Average Life to Stated Maturity longer than, and
a final stated maturity later than, the Indebtedness being
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refinanced; (iv) any such refinancing shall not exceed the sum of the
principal amount (or, if such Indebtedness provides for a lesser amount to
be due and payable upon a declaration of acceleration thereof, an amount no
greater than such lesser amount) of the Indebtedness being refinanced, plus
the amount of accrued and unpaid interest thereon, plus the amount of any
reasonably determined prepayment premium necessary to accomplish such
refinancing and such reasonable fees and expenses incurred in connection
therewith; (v) the Notes and Indebtedness that ranks pari passu with the
Notes may be refinanced only with Indebtedness that is made pari passu with
or subordinate in right of payment to the Notes, and Subordinated
Indebtedness may only be refinanced with Subordinated Indebtedness; and
(vi) the refinancing Indebtedness shall be incurred by the obligor of the
Indebtedness being refinanced or by the Company;
(g) Indebtedness of the Company such that, after giving effect to the
incurrence thereof, the total aggregate principal amount of Indebtedness
incurred under this clause (g) and any refinancings thereof otherwise
incurred in compliance with this Indenture would not exceed 250% of Total
Incremental Equity;
(h) Indebtedness of the Company or any Restricted Subsidiary incurred
under any Permitted Credit Facility, and any refinancings of the foregoing
otherwise incurred in compliance with this Indenture, in an aggregate
principal amount not to exceed the greater of $200.0 million or the
Borrowing Base determined as of the date such Indebtedness is incurred, at
any time outstanding;
(i) Indebtedness of the Company or any Restricted Subsidiary that is
Purchase Money Indebtedness;
(j) Indebtedness in respect of (i) letters of credit, bankers'
acceptances or other similar instruments or obligations, issued in
connection with liabilities incurred in the ordinary course of business or
(ii) surety, judgment, appeal, performance and other similar bonds,
instruments or obligations provided in the ordinary course of business; and
(k) in addition to the items referred to in clauses (a) through (j)
above, Indebtedness of the Company having an aggregate principal amount not
to exceed $50 million at any time outstanding.
"Permitted Investments" means (a) any Investment in the Company or in
a Wholly Owned Restricted Subsidiary of the Company or in a Person as a result
of which such Person becomes a Wholly Owned Restricted Subsidiary; (b)
Investments constituting Permitted Business Investments, the sum of which does
not exceed the greater of $40 million or 10% of the Company's Market
Capitalization, at any one time outstanding; (c) Cash Equivalents; (d)
Investments in prepaid expenses, negotiable instruments held for collection and
lease, utility and workers' compensation, performance and other similar
deposits; (e) Interest Rate Obligations incurred in compliance with Section
10.11 hereof; (f) loans and advances to employees made in the ordinary course
of business not to exceed $500,000 in the aggregate at any one time outstanding;
(g) bonds, notes, debentures or other securities (other than Capital Stock of
any Restricted Subsidiary that is not a Wholly Owned Restricted Subsidiary)
received as a result of Asset Sales permitted under Section 10.15 hereof; (h)
any Investment to the extent that the consideration therefor consists of Capital
Stock (other than Disqualified Stock) of the Company; and (i) the extension by
the Company of (x) trade credit to Subsidiaries of the Company represented by
accounts receivable, extended on usual and customary terms in the ordinary
course of business or (y) Guarantees of commitments for the purchase of goods or
services incurred in the ordinary course of business so long as such Guarantees,
to the extent constituting Indebtedness, are permitted to be incurred under
Section 10.11 hereof.
"Permitted Liens" means (a) Liens on property of a Person existing at
the time such Person is merged into or consolidated with the Company or any
Restricted Subsidiary or becomes a Restricted Subsidiary; provided that such
Liens were in existence prior to the contemplation of such merger, consolidation
or acquisition and do not secure any property or assets of the Company or any
Restricted Subsidiary other than the property or assets subject to the Liens
prior to such merger or consolidation or acquisition; (b) Liens imposed by law,
such as
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carriers', warehousemen's and mechanics' Liens and other similar Liens arising
in the ordinary course of business that secure payment of obligations not more
than 60 days past due or that are being contested in good faith and by
appropriate proceedings; (c) Liens existing on the Issue Date (including Liens
securing Indebtedness permitted under clause (b) of the definition of Permitted
Indebtedness); (d) Liens for taxes, assessments or governmental charges or
claims that are not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently conducted; provided
that any reserve or other appropriate provision as shall be required in
conformity with GAAP shall have been made therefor; (e) easements, rights of
way, restrictions and other similar easements, licenses, restrictions on the use
of properties, or minor imperfections of title that, in the aggregate, are not
material in amount and do not in any case materially detract from the properties
subject thereto or interfere with the ordinary conduct of the business of the
Company or the Restricted Subsidiaries; (f) Liens to secure the performance of
statutory obligations, surety or appeal bonds, performance bonds or other
obligations of a like nature incurred in the ordinary course of business
(exclusive of obligations for the payment of borrowed money); (g) Liens securing
Indebtedness incurred under a Permitted Credit Facility; provided, however, that
the incurrence of such Indebtedness is permitted by Section 10.11 hereof; (h)
Liens to secure any refinancing of any Indebtedness secured by Liens permitted
by this Indenture, but only to the extent that such Liens do not extend to any
other property or assets (other than improvements thereto); (i) Liens to secure
the Notes and Liens created under this Indenture; (j) Liens securing Purchase
Money Indebtedness; (k) Liens on and pledges of Capital Stock of any
Unrestricted Subsidiary securing any Indebtedness of such Unrestricted
Subsidiary; (l) Liens securing reimbursement obligations with respect to letters
of credit that encumber documents and other property relating to such letters of
credit and the products and proceeds thereof; (m) Liens to secure Capitalized
Lease Obligations permitted to be incurred under the Indenture; (n) Liens that
do not materially detract from the value of the property subject to such Liens,
that do not materially interfere with the ordinary conduct of the business of
the Company or any of its Restricted Subsidiaries, and that are made on
customary and usual terms applicable to similar assets; (o) pledges or deposits
by a Person under workmen's compensation laws, unemployment insurance laws or
similar legislation, or good faith deposits in connection with bids, tenders,
contracts (other than for the payment of Indebtedness) or leases to which such
Person is a party, or deposits to secure public or statutory obligations of such
Person, or deposits or cash or United States government bonds to secure surety
or appeal bonds to which such Person is a party, or deposits as security for
contested taxes or import duties or for the payment of rent, in each case
incurred in the ordinary course of business; (p) Liens customary in the industry
and incurred in the ordinary course of business securing Interest Rate
Obligations so long as the related Indebtedness is, and is permitted to be under
the Indenture, secured by a Lien on the same property securing such Interest
Rate Obligations; and (q) Liens held by the Company on the assets or property of
a Restricted Subsidiary of the Company to secure Indebtedness of such Restricted
Subsidiary owing to and held by the Company.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
"Predecessor Note" means, with respect to any particular Note, every
previous Note evidencing all or a portion of the same debt as that evidenced by
such particular Note; and, for the purposes of this definition, any Note
authenticated and delivered under Section 3.06 hereof in exchange for a
mutilated Note or in lieu of a lost, destroyed or stolen Note shall be deemed to
evidence the same debt as the mutilated, lost, destroyed or stolen Note.
"Preferred Stock" means, with respect to any Person, any and all
shares, interests, participations or other equivalents (however designated) of
such Person's preferred or preference stock whether now outstanding or issued
after the Issue Date, and including, without limitation, all classes and series
of preferred or preference stock of such Person.
"Private Placement Legend" shall mean the first paragraph of the
legend initially set forth in the Initial Notes in the form set forth on Exhibit
A-1.
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"Public Equity Offering" means an underwritten primary public offering
of Common Stock of the Company for cash pursuant to an effective registration
statement filed under the Securities Act.
"Purchase Agreement" means the Purchase Agreement, dated as of
February 16, 2000, by and among the Company and the Initial Purchasers, as the
same may be amended, supplemented or otherwise modified from time to time in
accordance with the terms thereof.
"Purchase Money Indebtedness" means Indebtedness of the Company or any
Restricted Subsidiary (including Acquired Indebtedness and Indebtedness
represented by Capitalized Lease Obligations, Attributable Debt in respect of
Sale/Leaseback Transactions, mortgage financings and purchase money
obligations), including any related notes, guarantees, collateral documents,
instruments and agreements executed in connection therewith, as the same may be
amended, supplemented, modified or restated from time to time, incurred at any
time for the purpose of financing all or any part of the cost of the
development, construction, expansion, installation, acquisition, lease or
improvement by the Company or any Restricted Subsidiary of any Permitted
Business Assets or not less than 66 2/3 percent of the outstanding Voting Stock
of a Person that becomes a Restricted Subsidiary the assets of which consist
primarily of Permitted Business Assets.
"Qualified Institutional Buyer" or "QIB" shall have the meaning
specified in Rule 144A.
"Redemption Date" means, with respect to any Note to be redeemed, the
date fixed by the Company for such redemption pursuant to this Indenture and the
Notes.
"Redemption Price" means, with respect to any Note to be redeemed, the
price fixed for such redemption pursuant to the terms of this Indenture and the
Notes.
"refinancing" has the meaning set forth in clause (f) of the
definition of "Permitted Indebtedness."
"Registrable Securities" means Transfer Restricted Notes, as defined
in the Registration Rights Agreement.
"Registration Rights Agreement" means the Notes Registration Rights
Agreement, dated as of February 23, 2000, between the Company and the Initial
Purchasers, as the same may be amended, supplemented or otherwise modified from
time to time in accordance with the terms thereof.
"Regular Record Date" means the Regular Record Date specified in the
Notes.
"Regulation S" means Regulation S under the Securities Act.
"Regulation S Global Note" means a permanent global note in registered
form representing the aggregate principal amount of Notes sold in reliance on
Regulation S.
"Responsible Officer" means, with respect to the Trustee, any officer
in the Corporate Trust Office of the Trustee or any other officer of the Trustee
customarily performing functions similar to those performed by any of the above
designated officers and also means, with respect to a particular corporate trust
matter, any other officer of the Trustee to whom any corporate trust matter is
referred because of his or her knowledge of and familiarity with the particular
subject.
"Restricted Note" means a Note that constitutes a "restricted
security" within the meaning of Rule 144(a)(3) under the Securities Act;
provided, however, that the Trustee shall be entitled to request and
conclusively rely on an Opinion of Counsel with respect to whether any Note
constitutes a Restricted Note.
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"Restricted Payment" means any of the following: (i) the declaration
or payment of any dividend or any other distribution on any Capital Stock of the
Company or any Restricted Subsidiary or any other payment made to the direct or
indirect holders (in their capacities as such) of Capital Stock of the Company
or any Restricted Subsidiary (other than any dividends, distributions or
payments made to the Company or any Restricted Subsidiary and dividends or
distributions payable solely in Capital Stock (other than Disqualified Stock) of
the Company or in options, warrants or other rights to purchase Capital Stock
(other than Disqualified Stock) of the Company); (ii) the purchase, redemption
or other acquisition or retirement for value of any Capital Stock of the Company
or any Restricted Subsidiary (other than any such Capital Stock owned by the
Company or a Restricted Subsidiary); (iii) the purchase, redemption, defeasance
or other acquisition or retirement for value, or the making of any principal
payment on, prior to any scheduled repayment, scheduled sinking fund payment or
scheduled maturity, of any Subordinated Indebtedness (other than any
Subordinated Indebtedness held by a Wholly Owned Restricted Subsidiary); or (iv)
the making by the Company or any Restricted Subsidiary of any Investment (other
than a Permitted Investment) in any Person.
"Restricted Subsidiary" means any Subsidiary of the Company that has
not been designated by the Board, by a Board Resolution delivered to the
Trustee, as an Unrestricted Subsidiary pursuant to and in compliance with
Section 10.20 hereof. Any such designation may be revoked by a Board Resolution
delivered to the Trustee, subject to the provisions of such covenant.
"Rule 144A" means Rule 144A under the Securities Act.
"S&P" means Standard & Poor's Rating Services, a division of The
McGraw-Hill Companies (and any successor).
"Sale/Leaseback Transaction" of any Person means an arrangement with
any lender or investor or to which such lender or investor is a party providing
for the leasing by such Person of any property or assets of such Person which
has been or is being sold or transferred by such Person after its acquisition
thereof or the completion of construction or commencement of operations thereof
to such lender or investor or to any other Person to whom funds have been or are
to be advanced by such lender or investor on the security of such property or
asset.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated by the Commission thereunder.
"Shelf Registration Statement" shall have the meaning specified in the
Registration Rights Agreement.
"Special Record Date" means, with respect to the payment of any
Defaulted Interest, a date fixed by the Trustee pursuant to Section 3.07 hereof.
"Stated Maturity" means, with respect to any Note or any installment
of interest thereon, the dates specified in such Note as the fixed date on which
the principal of such Note or such installment of interest is due and payable
and, when used with respect to any other Indebtedness, means the date specified
in the instrument governing such Indebtedness as the fixed date on which the
principal of such Indebtedness, or any installment of interest, is due and
payable.
"Strategic Equity Investor" means any Person that, as of the date of
determination, has a Market Capitalization or Consolidated Net Worth of at
least $2.0 billion and derives a substantial portion of its revenues from a
business related to the Permitted Business.
"Subordinated Indebtedness" means any Indebtedness of the Company
which is expressly subordinated in right of payment to any other Indebtedness of
the Company.
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"Subsidiary" means, with respect to any Person, (a) any corporation of
which the outstanding Capital Stock having at least a majority of the votes
entitled to be cast in the election of directors shall at the time be owned,
directly or indirectly, by such Person, or (b) any other Person of which at
least a majority of voting interest is at the time, directly or indirectly,
owned by such Person.
"Subsidiary Guarantor" means each Restricted Subsidiary that becomes
a guarantor of the Notes pursuant to the provisions of Section 10.22 hereof, in
each case until it is released from its Subsidiary Guarantee pursuant to the
terms thereof.
"Total Consolidated Indebtedness" means, at any date of determination,
an amount equal to the aggregate amount of all Indebtedness of the Company and
the Restricted Subsidiaries outstanding as of such date of determination.
"Total Incremental Equity" means, at any time of determination, the
sum of, without duplication, (a) the aggregate net cash proceeds received by the
Company from capital contributions in respect of existing Capital Stock (other
than Disqualified Stock) or the issuance and sale of Capital Stock (other than
Disqualified Stock but including Capital Stock issued upon the conversion of
convertible Indebtedness or from the exercise of options, warrants or rights to
purchase Capital Stock (other than Disqualified Stock)) subsequent to May 5,
1998, other than to a Subsidiary of the Company, plus (b) 80 percent of the Fair
Market Value of property (other than cash and Cash Equivalents) received by the
Company after May 5, 1998 as a contribution of capital or from the sale of its
Capital Stock (other than Disqualified Stock) to a Person that is not a
Subsidiary of the Company, minus (c) any amounts included in clause (a) above to
the extent used to make a Restricted Payment pursuant to clauses (2) or
(3)(A)(x) of Section 10.13 hereof.
"Trust Indenture Act" or "TIA" means the Trust Indenture Act of 1939,
as amended, as in force at the date as of which this Indenture was executed,
except as provided in Section 9.05 hereof; provided, however, that in the event
the Trust Indenture Act of 1939 is amended after such date, "Trust Indenture
Act" means, to the extent required by any such amendment, the Trust Indenture
Act of 1939, as so amended.
"Trustee" means the Person named as the "Trustee" in the first
paragraph of this Indenture, until a successor Person shall have replaced such
Person pursuant to the applicable provisions of this Indenture, and thereafter
"Trustee" shall mean such successor Person.
"Unrestricted Notes" means one or more Notes that do not and are not
required to bear the Private Placement Legend in the form set forth in Exhibit
A, including, without limitation, the Exchange Notes.
"Unrestricted Subsidiary" means any Subsidiary of the Company
designated as such pursuant to and in compliance with Section 10.20 hereof. Any
such designation may be revoked by a Board Resolution delivered to the Trustee,
subject to the provisions of such covenant.
"Voting Stock" means, with respect to any Person, the Capital Stock of
any class or kind ordinarily having the power to vote for the election of
directors or other members of the governing body of such Person.
"voting power" means, with respect to the Capital Stock of any Person,
the relative voting power in any general election of directors or other members
of the governing body of such Person.
"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary
of which 100% of the outstanding Capital Stock is owned by the Company or
another Wholly Owned Restricted Subsidiary. For the purposes of this
definition, any directors' qualifying shares or investments by foreign nationals
mandated by applicable law shall be disregarded in determining the ownership of
a Restricted Subsidiary.
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Section 1.02. Other Definitions.
<TABLE>
<CAPTION>
Defined in
Term Section
---- ------------
<S> <C>
"Act" 1.05
"Additional Interest" 10.23
"Additional Interest Payment Date" 10.23
"Affiliate Transaction" 10.14
"Agent" 3.02
"Agent Members" 3.16
"Asset Sale Offer" 10.15
"Asset Sale Offer Purchase Date" 10.15
"Assumed Indebtedness" 10.15
"assumed liabilities" 10.15
"Change of Control Date" 10.10
"Change of Control Offer" 10.10
"Change of Control Payment Date" 10.10
"covenant defeasance" 4.03
"Defaulted Interest" 3.07
"defeasance" 4.02
"Defeased Notes" 4.01
"Designation" 10.20
"Designation Amount" 10.20
"Event of Default" 5.01
"incur" 10.11
"Investment Company Act" 4.04
"Note Amount" 10.15
"Note Pro Rate Share of Unutilized
Net Cash Proceeds" 10.15
"Note Register" 3.05
"Other Indebtedness" 10.15
"Paying Agent" 3.02
"Permitted Business Assets" 10.15
"Physical Notes" 2.01
"Registrar" 3.02
"Registration Default" 10.23
"Restricted Period" 3.17
"Revocation" 10.20
"Subsidiary Guarantee" 10.22
"surviving entity" 8.01
"Unutilized Net Cash Proceeds" 10.15
</TABLE>
Section 1.03. Rules of Construction.
For all purposes of this Indenture, except as otherwise expressly
provided or unless the context otherwise requires:
(a) the terms defined in this Article (including terms referred to in
Section 1.02 hereof) have the meanings assigned to them in this Article, and
include the plural as well as the singular;
(b) all other terms used herein which are defined in the Trust
Indenture Act, either directly or by reference therein, have the meanings
assigned to them therein;
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(c) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with GAAP as in effect on the Issue
Date;
(d) the words "herein" "hereof" and "hereunder" and other words of
similar import refer to this Indenture as a whole and not to any particular
Article, Section or other subdivision;
(e) all references to "$" or "dollars" refer to the lawful currency of
the United States of America; and
(f) the words "include," "included" and "including" as used herein are
deemed in each case to be followed by the phrase "without limitation."
Section 1.04. Form of Documents Delivered to Trustee.
In any case where several matters are required to be certified by, or
covered by an opinion of, any specified Person, it is not necessary that all
such matters be certified by, or covered by the opinion of, only one such
Person, or that they be so certified or covered by only one document, but one
such Person may certify or give an opinion with respect to some matters and one
or more other Persons as to other matters, and any such Person may certify or
give an opinion as to such matters in one or several documents.
Any certificate or opinion of an Officer may be based, insofar as it
relates to legal matters, upon a certificate or opinion of, or representations
by, counsel, unless such Officer knows that the certificate or opinion or
representations with respect to the matters upon which his certificate or
opinion is based are erroneous. Any such certificate or opinion may be based,
insofar as it relates to factual matters, upon a certificate or opinion of, or
representations by, an Officer or Officers of the Company, stating that the
information with respect to such factual matters is in the possession of the
Company, unless such counsel knows that the certificate or opinion or
representations with respect to such matters are erroneous.
Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture, they may, but need not, be consolidated, with
proper identification of each matter covered therein, and form one instrument.
Section 1.05. Acts of Holders.
Any request, demand, authorization, direction, notice, consent, waiver
or other action provided by this Indenture to be given or taken by Holders may
be embodied in and evidenced by one or more instruments of substantially similar
tenor signed by such Holders in person or by an agent duly appointed in writing;
and, except as herein otherwise expressly provided, such action shall become
effective when such instrument or instruments are delivered to the Trustee and,
where it is hereby expressly required, to the Company. Such instrument or
instruments (and the action embodied therein and evidenced thereby) are herein
sometimes referred to as the "Act" of the Holders signing such instrument or
instruments. Proof of execution (as provided below in this Section 1.05) of any
such instrument or of a writing appointing any such agent shall be sufficient
for any purpose of this Indenture and (subject to Section 6.01 hereof)
conclusive in favor of the Trustee and the Company, if made in the manner
provided in this Section.
The fact and date of the execution by any Person of any such
instrument or writing may be proved in any reasonable manner which the Trustee
deems sufficient.
The ownership of Notes shall be proved by the Note Register.
Any request, demand, authorization, direction, notice, consent, waiver
or other action by the Holder of any Note shall bind every future Holder of the
same Note or the Holder of every Note issued upon the
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transfer thereof or in exchange therefor or in lieu thereof to the same extent
as the original Holder, in respect of anything done, suffered or omitted to be
done by the Trustee, any Paying Agent, the Company or any other obligor upon the
Notes in reliance thereon, whether or not notation of such action is made upon
such Note.
Section 1.06. Notices, etc., to the Trustee and the Company.
Any request, demand, authorization, direction, notice, consent, waiver
or other action of Holders or other document provided or permitted by this
Indenture to be made upon, given or furnished to, or filed with:
(a) the Trustee by any Holder or by the Company shall be sufficient
for every purpose hereunder if made, given, furnished or filed, in writing, to
or with the Trustee at: State Street Bank and Trust Company of California, N.A.,
Library Tower, 633 West 5th Street, 12th Floor, Los Angeles, California 90071,
Attention: Corporate Trust Department (Rhythms NetConnections Inc. 14% Senior
Notes due 2010), or at any other address previously furnished in writing to the
Holders and the Company by the Trustee; or
(b) the Company by the Trustee or by any Holder shall be sufficient
for every purpose (except as otherwise expressly provided herein) hereunder if
in writing and mailed, first-class postage prepaid, to the Company addressed to
it at Rhythms NetConnections Inc., 6933 South Revere Parkway, Englewood,
Colorado 80112, Attention: Chief Executive Officer, or at any other address
previously furnished in writing to the Trustee by the Company.
Section 1.07. Notice to Holders; Waiver.
Where this Indenture provides for notice to Holders of any event, such
notice shall be sufficiently given (unless otherwise expressly provided herein)
if in writing and mailed, first-class postage prepaid, to each Holder affected
by such event, at the address of such Holder as it appears in the Note Register,
not later than the latest date, and not earlier than the earliest date,
prescribed for the giving of such notice. In any case where notice to Holders
is given by mail, neither the failure to mail such notice, nor any defect in any
notice so mailed, to any particular Holder shall affect the sufficiency of such
notice with respect to other Holders. Any notice when mailed to a Holder in the
aforesaid manner shall be conclusively deemed to have been received by such
Holder whether or not actually received by such Holder. Where this Indenture
provides for notice in any manner, such notice may be waived in writing by the
Person entitled to receive such notice, either before or after the event, and
such waiver shall be the equivalent of such notice. Waivers of notice by
Holders shall be filed with the Trustee, but such filing shall not be a
condition precedent to the validity of any action taken in reliance upon such
waiver.
In case by reason of the suspension of regular mail service or by
reason of any other cause, it shall be impracticable to mail notice of any event
as required by any provision of this Indenture, then any method of giving such
notice as shall be satisfactory to the Trustee shall be deemed to be a
sufficient giving of such notice.
Section 1.08. Conflict with Trust Indenture Act.
If any provision hereof limits, qualifies or conflicts with any
provision of the Trust Indenture Act or another provision which is required or
deemed to be included in this Indenture by any of the provisions of the Trust
Indenture Act, such provision or requirement of the Trust Indenture Act shall
control.
If any provision of this Indenture modifies or excludes any provision
of the Trust Indenture Act that may be so modified or excluded, the latter
provision shall be deemed to apply to this Indenture as so modified or excluded,
as the case may be.
Section 1.09. Effect of Headings and Table of Contents.
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The Article and Section headings herein and the Table of Contents are
for convenience only and shall not affect the construction hereof.
Section 1.10. Successors and Assigns.
All covenants and agreements in this Indenture by the Company shall
bind its respective successors and assigns, whether so expressed or not.
Section 1.11. Separability Clause.
In case any provision in this Indenture or in the Notes issued
pursuant hereto shall be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby.
Section 1.12. Benefits of Indenture.
Nothing in this Indenture or in the Notes issued pursuant hereto,
express or implied, shall give to any Person (other than the parties hereto and
their successors hereunder, any Paying Agent and the Holders) any benefit or any
legal or equitable right, remedy or claim under this Indenture.
Section 1.13. GOVERNING LAW.
THIS INDENTURE, THE NOTES AND EACH SUBSIDIARY GUARANTEE, IF ANY,
SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF
NEW YORK WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW.
Section 1.14. No Recourse Against Others.
A director, officer, employee or stockholder, as such, of the Company
or any Subsidiary Guarantor shall not have any liability for any obligations of
the Company or such Subsidiary Guarantor under the Notes, any Subsidiary
Guarantee or this Indenture or for any claim based on, in respect of or by
reason of such obligations or their creation.
Section 1.15. Independence of Covenants.
Except as otherwise expressly provided herein, all covenants and
agreements in this Indenture shall be given independent effect so that if a
particular action or condition is not permitted by any of such covenants, the
fact that it would be permitted by an exception to, or be otherwise within the
limitations of, another covenant shall not avoid the occurrence of a Default if
such action is taken or condition exists.
Section 1.16. Exhibits and Schedules.
All exhibits and schedules attached hereto are by this reference made
a part hereof with the same effect as if herein set forth in full.
Section 1.17. Counterparts.
This Indenture may be executed in any number of counterparts and by
telecopier, each of which shall be an original; but such counterparts shall
together constitute but one and the same instrument.
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Section 1.18. Duplicate Originals.
The parties may sign any number of copies of this Indenture. Each
signed copy shall be an original, but all of them together represent the same
agreement.
ARTICLE TWO
FORM OF NOTES
Section 2.01. Form and Dating.
The Notes and the Trustee's certificate of authentication with respect
thereto shall be as required by Section 3.03 hereof.
The definitive Notes shall be printed, typewritten, lithographed or
engraved or produced by any combination of these methods or may be produced in
any other manner permitted by the rules of any securities exchange on which the
Notes may be listed, all as determined by the Officers executing such Notes, as
evidenced by their execution of such Notes.
Each Note shall be dated the date of its issuance and shall show the
date of its authentication.
Notes offered and sold in reliance on Rule 144A and Notes offered and
sold in reliance on Regulation S shall be issued initially in the form of one or
more Global Notes, substantially in the form set forth in Exhibit A-1, deposited
with the Trustee, as custodian for the Depository, duly executed by the Company
and authenticated by the Trustee as hereinafter provided and shall bear the
legend set forth in Exhibit C. The aggregate principal amount of the Global
Notes may from time to time be increased or decreased by adjustments made on the
records of the Trustee, as custodian for the Depository, as hereinafter
provided.
Notes issued in exchange for interests in a Global Note pursuant to
Section 3.17 hereof may be issued in the form of permanent certificated Notes in
registered form in substantially the form set forth in Exhibit A-1 with respect
to the Initial Notes and Exhibit A-2 with respect to Exchange Notes (in each
case, the "Physical Notes").
The Notes shall have notated thereon evidence of each Subsidiary
Guarantee, if any, in the form set forth in Annex A to Exhibit B; provided,
however, that the failure of any Note to include such notation shall not affect
the validity or enforceability of such Subsidiary Guarantee or such Note against
any Subsidiary Guarantor.
ARTICLE THREE
THE NOTES
Section 3.01. Title and Terms.
The aggregate principal amount of Notes which may be authenticated and
delivered under this Indenture is limited to $300,000,000 in aggregate principal
amount of Notes, except for Notes authenticated and delivered upon registration
of transfer of, or in exchange for, or in lieu of, other Notes pursuant to
Section 3.03, 3.04, 3.05, 3.06, 9.06, 10.10 or 10.15 hereof or the optional
redemption provisions of the Notes.
The Stated Maturity of the principal of the Notes shall be February
15, 2010. Cash interest on the Notes shall accrue at the rate of 14% per annum
from February 23, 2000 or from the most recent Interest Payment Date to which
interest has been paid or duly provided for, payable semi-annually on February
15 and August 15, in each year, commencing on August 15, 2000, to the registered
Holders at the close of business on the February 1 or
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<PAGE>
August 1, respectively, immediately preceding such Interest Payment Dates, until
the principal thereof is paid or duly provided for.
At the election of the Company, the entire Indebtedness on the Notes
or certain of the Company's obligations and covenants and certain Events of
Default thereunder may be defeased as provided in Article Four.
Section 3.02. Registrar and Paying Agent.
The Company shall maintain an office or agency (which shall be located
in the Borough of Manhattan in The City of New York, State of New York) where
Notes may be presented or surrendered for registration of transfer or for
exchange (the "Registrar"), an office or agency (which shall be located in the
Borough of Manhattan in The City of New York, State of New York) where Notes may
be presented or surrendered for payment (the "Paying Agent" or "Agent") and an
office or agency where notices and demands to or upon the Company in respect of
the Notes and this Indenture may be served. The Registrar and any co-Registrar
shall keep a register of the Notes and of their transfer and exchange. The
Company may have one or more co-registrars and one or more additional paying
agents. The term "Paying Agent" or "Agent" includes any additional paying
agent. The Company may act as its own Paying Agent. The Company may change the
Paying Agent or Registrar without notice to any Holder.
The Company shall enter into an appropriate agency agreement with any
Agent not a party to this Indenture, which shall incorporate the provisions of
the Trust Indenture Act. The agreement shall implement the provisions of this
Indenture that relate to such Agent. The Company shall notify the Trustee of
the name and address of any such Agent. If the Company fails to maintain a
Registrar or Paying Agent, or fails to give the foregoing notice, the Trustee
shall act as such and shall be entitled to appropriate compensation in
accordance with Section 6.07 hereof.
The Company initially appoints the Trustee as the Registrar and Paying
Agent and agent for service of notices and demands in connection with the Notes,
until such time as the Trustee has resigned or a successor has been appointed.
Section 3.03. Execution and Authentication.
The Initial Notes and the Trustee's certificate of authentication
shall be substantially in the form of Exhibit A-1 hereto, and the Exchange Notes
and the Trustee's certificate of authentication relating thereto shall be
substantially in the form of Exhibit A-2 hereto, in each case with such
appropriate insertions, omissions, substitutions and other variations as are
permitted or required by this Indenture. The Notes may have such letters,
numbers or other marks of identification and such notations, legends or
endorsements required by law, stock exchange rule, rule of the Depository or any
clearing agency or usage. The Company shall approve the form of the Notes and
any notation, legend or endorsement thereon. Each Note shall be dated the date
of issuance and shall show the date of its authentication.
The terms and provisions contained in the Notes annexed hereto as
Exhibit A-1 and Exhibit A-2 shall constitute, and are hereby expressly made, a
part of this Indenture and, to the extent applicable, the Company and the
Trustee, by their execution and delivery of this Indenture, expressly agree to
such terms and provisions and to be bound thereby.
Two Officers, or an Officer and an Assistant Secretary, of the Company
shall sign, or one Officer of the Company shall sign, and one Officer or an
Assistant Secretary of the Company (each of whom shall, in each case, have been
duly authorized by all requisite corporate actions) shall attest to, the Notes
for the Company by manual or facsimile signature and may be imprinted or
otherwise reproduced.
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An officer of a Subsidiary Guarantor (who shall have been duly
authorized by all requisite corporate actions) shall sign by manual or facsimile
signature, which may be imprinted or otherwise reproduced, a notation, in the
form of Annex A to Exhibit B, in respect of the Subsidiary Guarantee of such
Subsidiary Guarantor, on the Notes transferred and exchanged subsequent to the
issuance of such Subsidiary Guarantee for so long as it remains outstanding.
If an Officer or Assistant Secretary of the Company or an officer of a
Subsidiary Guarantor whose signature is on a Note or a notation, as the case may
be, was an officer or (in the case of the Company) Officer or Assistant
Secretary at the time of such execution but no longer holds that office or
position at the time the Trustee authenticates the Note, then the Note, the
Subsidiary Guarantee, if any, and any notation thereon shall nevertheless be
valid.
A Note shall not be valid until an authorized signatory of the Trustee
manually signs the certificate of authentication on the Note. The signature of
such representative of the Trustee shall be conclusive evidence that the Note
has been authenticated under this Indenture.
The Trustee shall authenticate (i) Initial Notes for original issue in
an aggregate principal amount not to exceed $300,000,000 and (ii) Unrestricted
Notes from time to time only in exchange for a like principal amount of Initial
Notes, upon a written order of the Company in the form of an Officers'
Certificate of the Company. Each such written order shall specify the amount of
Notes to be authenticated and the date on which the Notes are to be
authenticated, whether the Notes are to be Initial Notes or Unrestricted Notes
and whether (subject to Section 2.01 and this Section 3.03) the Notes are to be
issued as Physical Notes or Global Notes and such other information as the
Trustee may reasonably request. The aggregate principal amount of Notes
Outstanding at any time may not exceed $300,000,000, except as provided in
Section 3.06 hereof.
Notwithstanding the foregoing, all Notes issued under this Indenture
shall vote and consent together on all matters (as to which any of such Notes
may vote or consent) as one class and no series of Notes will have the right to
vote or consent as a separate class on any matter.
The Trustee may appoint an authenticating agent reasonably acceptable
to the Company to authenticate Notes. Unless otherwise provided in the
appointment, an authenticating agent may authenticate Notes whenever the Trustee
may do so. Each reference in this Indenture to authentication by the Trustee
includes authentication by such agent. An authenticating agent has the same
rights as an Agent to deal with the Company and Affiliates of the Company.
The Notes shall be issuable in fully registered form only, without
coupons, in denominations of $1,000 and any integral multiple thereof.
Section 3.04. Temporary Notes.
Until definitive Notes are prepared and ready for delivery, the
Company may execute and upon a Company Order the Trustee shall authenticate and
deliver temporary Notes. The Company Order shall specify the amount of
temporary Notes to be authenticated and the date on which the temporary Notes
are to be authenticated. Temporary Notes shall be substantially in the form of
definitive Notes, in any authorized denominations, but may have variations that
the Company reasonably considers appropriate for temporary Notes as conclusively
evidenced by the Company's execution of such temporary Notes.
If temporary Notes are issued, the Company will cause definitive Notes
to be prepared without unreasonable delay but in no event later than the date
that the Exchange Offer is consummated. After the preparation of definitive
Notes, the temporary Notes shall be exchangeable for definitive Notes upon
surrender of the temporary Notes at the office or agency of the Company
designated for such purpose pursuant to Section 10.02 hereof, without charge to
the Holder. Upon surrender for cancellation of any one or more temporary Notes,
the
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Company shall execute and the Trustee shall authenticate and deliver in exchange
therefor a like principal amount of definitive Notes of like tenor and of
authorized denominations. Until so exchanged the temporary Notes shall in all
respects be entitled to the same benefits under this Indenture as definitive
Notes.
Section 3.05. Transfer and Exchange.
The Company shall cause to be kept at the Corporate Trust Office of
the Trustee a register (the register maintained in such office and in any other
office or agency designated pursuant to Section 10.02 hereof being sometimes
referred to herein as the "Note Register") in which, subject to such reasonable
regulations as the Registrar may prescribe, the Company shall provide for the
registration of Notes and of transfers and exchanges of Notes. The Trustee is
hereby initially appointed Registrar for the purpose of registering Notes and
transfers of Notes as herein provided.
Subject to Sections 3.16 and 3.17, when Notes are presented to the
Registrar or a co-Registrar with a request from the Holder of such Notes to
register the transfer or exchange for an equal principal amount of Notes of
other authorized denominations, such Registrar or co-Registrar shall register
the transfer or make the exchange as requested if its requirements for such
transaction are met; provided, however, that every Note presented or surrendered
for registration of transfer or exchange shall be duly endorsed or be
accompanied by a written instrument of transfer or exchange in form satisfactory
to the Company and the Registrar or co-Registrar, duly executed by the Holder
thereof or his attorney duly authorized in writing. Whenever any Notes are so
presented for exchange, at the Registrar's or co-Registrar's written request,
the Company shall execute, and the Trustee shall authenticate and deliver, the
Notes which the Holder making the exchange is entitled to receive, and each
Subsidiary Guarantor, if any, shall execute a notation on such Notes with
respect to its Subsidiary Guarantee. No service charge shall be made to the
Holder for any registration of transfer or exchange. The Company may require
from the Holder payment of a sum sufficient to cover any transfer taxes or other
governmental charge that may be imposed in relation to a transfer or exchange,
but this provision shall not apply to any exchange pursuant to Section 10.10,
10.15 or 9.06 hereof (in which events the Company will be responsible for the
payment of all such taxes which arise solely as a result of the transfer or
exchange and do not depend on the tax status of the Holder). The Trustee shall
not be required to exchange or register the transfer of any Note for a period of
15 days immediately preceding the first mailing of notice of redemption of Notes
to be redeemed or of any Note selected, called or being called for redemption
except, in the case of any Note where public notice has been given that such
Note is to be redeemed in part, the portion thereof not to be redeemed.
All Notes issued upon any registration of transfer or exchange of
Notes shall be the valid obligations of the Company and each Subsidiary
Guarantor, if any, evidencing the same Indebtedness, and entitled to the same
benefits under this Indenture, as the Notes surrendered upon such registration
of transfer or exchange.
Any Holder of a beneficial interest in a Global Note shall, by
acceptance of such beneficial interest, agree that transfers of beneficial
interests in such Global Notes may be effected only through a book-entry system
maintained by the Holder of such Global Note (or its agent), and that ownership
of a beneficial interest in the Note shall be required to be reflected in a
book-entry system.
Section 3.06. Mutilated, Destroyed, Lost and Stolen Notes.
If a mutilated Note is surrendered to the Trustee or if the Holder of
a Note of any series claims that the Note has been lost, destroyed or stolen,
the Company and each Subsidiary Guarantor, if any, shall execute and upon a
Company Order, the Trustee shall authenticate and deliver a replacement Note of
like tenor and principal amount, bearing a number not contemporaneously
outstanding if the Holder of such Note furnishes to the Company, each Subsidiary
Guarantor, if any, and to the Trustee evidence reasonably acceptable to them of
the ownership and the destruction, loss or theft of such Note and an indemnity
bond shall be posted by such Holder, sufficient in the judgment of the Company
or the Trustee, as the case may be, to protect the Company, each Subsidiary
Guarantor, if any, the Trustee or any Agent from any loss that any of them may
suffer if such Note is replaced. The Company
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may charge such Holder for the Company's expenses in replacing such Note
(including (i) expenses of the Trustee charged to the Company and (ii) any tax
or other governmental charge that may be imposed) and the Trustee may charge the
Company for the Trustee's expenses in replacing such Note.
Every replacement Note issued pursuant to this Section in lieu of any
destroyed, lost or stolen Note shall constitute an original additional
contractual obligation of the Company and each Subsidiary Guarantor, if any,
whether or not the destroyed, lost or stolen Note shall be at any time
enforceable by anyone, and shall be entitled to all benefits of this Indenture
equally and proportionately with any and all other Notes duly issued hereunder.
The provisions of this Section are exclusive and shall preclude (to
the extent lawful) all other rights and remedies with respect to the replacement
or payment of mutilated, destroyed, lost or stolen Notes.
Section 3.07. Payment of Interest; Interest Rights Preserved.
Interest on any Note which is payable, and is punctually paid or duly
provided for, on any Interest Payment Date shall be paid to the Person in whose
name that Note (or one or more Predecessor Notes) is registered at the close of
business on the Regular Record Date for such interest.
Any interest on any Note which is payable, but is not punctually paid
or duly provided for, on any Interest Payment Date and interest on such
defaulted interest at the then applicable interest rate borne by the Notes, to
the extent lawful (such defaulted interest and interest thereon herein
collectively called "Defaulted Interest") shall forthwith cease to be payable to
the Holder on the Regular Record Date; and such Defaulted Interest may be paid
by the Company, at its election in each case, as provided in subsection (a) or
(b) below:
(a) The Company may elect to make payment of any Defaulted Interest to
the Persons in whose names the Notes (or their respective Predecessor Notes) are
registered at the close of business on a Special Record Date for the payment of
such Defaulted Interest, which shall be fixed in the following manner. The
Company shall notify the Trustee in writing of the amount of Defaulted Interest
proposed to be paid on each Note and the date of the proposed payment, and at
the same time the Company shall deposit with the Trustee an amount of money
equal to the aggregate amount proposed to be paid in respect of such Defaulted
Interest or shall make arrangements satisfactory to the Trustee for such deposit
prior to the date of the proposed payment, such money when deposited to be held
in trust for the benefit of the Persons entitled to such Defaulted Interest as
provided in this subsection (a). Thereupon the Trustee shall fix a Special
Record Date for the payment of such Defaulted Interest which shall be not more
than 15 days and not less than 10 days prior to the date of the proposed payment
and not less than 10 days after the receipt by the Trustee of the notice of the
proposed payment. The Trustee shall promptly notify the Company in writing of
such Special Record Date. In the name and at the expense of the Company, the
Trustee shall cause notice of the proposed payment of such Defaulted Interest
and the Special Record Date therefor to be mailed, first-class postage prepaid,
to each Holder at its address as it appears in the Note Register, not less than
10 days prior to such Special Record Date. Notice of the proposed payment of
such Defaulted Interest and the Special Record Date therefor having been so
mailed, such Defaulted Interest shall be paid to the Persons in whose names the
Notes (or their respective Predecessor Notes) are registered on such Special
Record Date and shall no longer be payable pursuant to the following subsection
(b).
(b) The Company may make payment of any Defaulted Interest in any
other lawful manner not inconsistent with the requirements of any securities
exchange or market on which the Notes may be listed, and upon such notice as may
be required by such exchange or market, if, after written notice given by the
Company to the Trustee of the proposed payment pursuant to this subsection (b),
such payment shall be deemed practicable by the Trustee.
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Subject to the foregoing provisions of this Section, each Note
delivered under this Indenture upon registration of transfer of or in exchange
for or in lieu of any other Note shall carry the rights to interest accrued and
unpaid, and to accrue, which were carried by such other Note.
Section 3.08. Persons Deemed Owners.
Prior to and at the time of due presentment for registration of
transfer, the Company, the Trustee and any agent of the Company or the Trustee
may treat the Person in whose name any Note is registered in the Note Register
as the owner of such Note for the purpose of receiving payment of principal of,
premium, if any, and (subject to Section 3.07 hereof) interest on such Note and
for all other purposes whatsoever, whether or not such Note shall be overdue,
and none of the Company, the Trustee or any agent of the Company or the Trustee
shall be affected by notice to the contrary.
Section 3.09. Cancellation.
All Notes surrendered for payment, redemption, registration of
transfer or exchange shall be delivered to the Trustee and, if not already
canceled, shall be promptly canceled by it. The Company may at any time deliver
to the Trustee for cancellation any Notes previously authenticated and delivered
hereunder which the Company may have acquired in any manner whatsoever, and all
Notes so delivered shall be promptly canceled by the Trustee. The Registrar,
any co-Registrar and the Paying Agent shall forward to the Trustee any Notes
surrendered to them for registration of transfer or exchange, redemption or
payment. The Trustee and no one else shall cancel all Notes surrendered for
registration of transfer, exchange, payment, replacement or cancellation. No
Notes shall be authenticated in lieu of or in exchange for any Notes canceled as
provided in this Section 3.09, except as expressly permitted by this Indenture.
All canceled Notes held by the Trustee shall be destroyed and certification of
their destruction delivered to the Company unless by a Company Order the Company
shall direct that the canceled Notes be returned to it. The Trustee shall
provide the Company a list of all Notes that have been canceled from time to
time as requested by the Company.
Section 3.10. Computation of Interest.
Interest on the Notes shall be computed on the basis of a 360-day year
of twelve 30-day months and, in the case of a partial month, the actual number
of days elapsed.
Section 3.11. Legal Holidays.
In any case where any Interest Payment Date, Redemption Date, date
established for the payment of Defaulted Interest or Stated Maturity of any Note
shall not be a Business Day, then (notwithstanding any other provision of this
Indenture or of the Notes) payment of principal, premium, if any, or interest
need not be made on such date, but may be made on the next succeeding Business
Day with the same force and effect as if made on the Interest Payment Date,
Redemption Date, date established for the payment of Defaulted Interest or at
the Stated Maturity, as the case may be. In such event, no interest shall
accrue with respect to such payment for the period from and after such Interest
Payment Date, Redemption Date, date established for the payment of Defaulted
Interest or Stated Maturity, as the case may be, to the next succeeding Business
Day and, with respect to any Interest Payment Date, interest for the period from
and after such Interest Payment Date shall accrue with respect to the next
succeeding Interest Payment Date.
Section 3.12. CUSIP and CINS Numbers.
The Company in issuing the Notes may use "CUSIP" and "CINS" numbers
(if then generally in use), and, if so, the Trustee shall use the CUSIP or CINS
numbers, as the case may be, in notices of redemption or exchange as a
convenience to Holders; provided, however, that any such notice may state that
no representation is made as to the correctness or accuracy of the CUSIP or CINS
number, as the case may be, printed in the notice or on
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the Notes, and that reliance may be placed only on the other identification
numbers printed on the Notes. The Company shall promptly notify the Trustee in
writing of any change in the CUSIP or CINS number of any series of Notes.
Section 3.13. Paying Agent To Hold Money in Trust.
Each Paying Agent shall hold in trust for the benefit of the Holders
or the Trustee all money held by the Paying Agent for the payment of principal
of, premium, if any, or interest on the Notes, and shall notify the Trustee of
any default by the Company in making any such payment. Money held in trust by
the Paying Agent need not be segregated except as required by law, and in no
event shall the Paying Agent be liable for any interest on any money received by
it hereunder. The Company at any time may require the Paying Agent to pay all
money held by it to the Trustee and account for any funds disbursed, and the
Trustee may at any time during the continuance of any Event of Default, upon a
Company Order to the Paying Agent, require such Paying Agent to pay forthwith
all money so held by it to the Trustee and to account for any funds disbursed.
Upon making such payment, the Paying Agent shall have no further liability for
the money delivered to the Trustee.
Section 3.14. Intentionally Omitted.
Section 3.15. Deposits of Monies.
Prior to 11:00 a.m. New York City time on each Interest Payment Date,
maturity date, Redemption Date, Change of Control Payment Date, date for the
payment of Defaulted Interest and Asset Sale Offer Purchase Date, the Company
shall have deposited with the Paying Agent in immediately available funds money
sufficient to make cash payments, if any, due on such Interest Payment Date,
maturity date, Redemption Date, Change of Control Payment Date, date for the
payment of Defaulted Interest or Asset Sale Offer Purchase Date, as the case may
be, in a timely manner which permits the Paying Agent to remit payment to the
Holders on such Interest Payment Date, maturity date, Redemption Date, Change of
Control Payment Date, date for the payment of Defaulted Interest or Asset Sale
Offer Purchase Date, as the case may be.
Section 3.16. Book-Entry Provisions for Global Notes.
(a) The Global Notes initially shall (i) be registered in the name of
the Depository or the nominee of such Depository, (ii) be delivered to the
Trustee as custodian for such Depository and (iii) bear legends as set forth in
Exhibit C.
Members of, or participants in, the Depository ("Agent Members") shall
have no rights under this Indenture with respect to any Global Note held on
their behalf by the Depository, or the Trustee as its custodian, or under the
Global Note, and the Depository may be treated by the Company, the Trustee and
any agent of the Company or the Trustee as the absolute owner of the Global Note
for all purposes whatsoever. Notwithstanding the foregoing, nothing herein
shall prevent the Company, the Trustee or any agent of the Company or the
Trustee from giving effect to any written certification, proxy or other
authorization furnished by the Depository or impair, as between the Depository
and its Agent Members, the operation of customary practices governing the
exercise of the rights of a Holder of any Note.
(b) Transfers of Global Notes shall be limited to transfers in whole,
but not in part, to the Depository, its successors or their respective nominees.
Interests of beneficial owners in the Global Notes may be transferred or
exchanged for Physical Notes in accordance with the rules and procedures of the
Depository and the provisions of Sections 3.03 and 3.17 hereof. In addition,
Physical Notes shall be transferred to all beneficial owners in exchange for
their beneficial interests in Global Notes if (i) the Depository notifies the
Company that it is unwilling or unable to continue as Depository for any Global
Note, or that it will cease to be a "Clearing Agency" under the Exchange Act,
and in either case a successor Depository is not appointed by the Company within
90 days
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of such notice or (ii) an Event of Default has occurred and is continuing and
the Registrar or co-Registrar has received a written request from the Depository
to issue Physical Notes.
(c) In connection with any transfer or exchange of a portion of the
beneficial interest in any Global Note to beneficial owners pursuant to
paragraph (b) of this Section 3.16, the Registrar or co-Registrar shall (if one
or more Physical Notes are to be issued) reflect on its books and records the
date and a decrease in the principal amount of the Global Note in an amount
equal to the principal amount of the beneficial interest in the Global Note to
be transferred, and the Company shall execute, and upon receipt of a Company
Order the Trustee shall authenticate and deliver, one or more Physical Notes of
like tenor and principal amount of authorized denominations, and each Subsidiary
Guarantor, if any, shall execute a notation thereon in respect of its Subsidiary
Guarantee.
(d) In connection with the transfer of Global Notes as an entirety to
beneficial owners pursuant to paragraph (b) of this Section 3.16, the Global
Notes shall be deemed to be surrendered to the Trustee for cancellation, and the
Company shall execute, and upon receipt of a Company Order the Trustee shall
authenticate and deliver, to each beneficial owner identified by the Depository
in exchange for its beneficial interest in the Global Notes, an equal aggregate
principal amount of Physical Notes of like tenor of authorized denominations,
and each Subsidiary Guarantor, if any, shall execute a notation thereon in
respect of its Subsidiary Guarantee.
(e) Any Physical Note constituting a Restricted Note delivered in
exchange for an interest in a Global Note pursuant to subparagraph (b), (c) or
(d) of this Section 3.16 shall, except as otherwise provided by Section 3.17
hereof, bear the Private Placement Legend.
(f) The Holder of any Global Note may grant proxies and otherwise
authorize any Person, including Agent Members and Persons that may hold
interests through Agent Members, to take any action which a Holder is entitled
to take under this Indenture or the Notes.
Section 3.17. Special Transfer Provisions.
(a) Transfers to Non-QIB Institutional Accredited Investors. The
following additional provisions shall apply with respect to the registration of
any proposed transfer of an Initial Note to any Institutional Accredited
Investor which is not a QIB:
(i) the Registrar or co-Registrar shall register the transfer of
any Initial Note, whether or not such Note bears the Private Placement Legend,
if (x) the requested transfer is after the second anniversary of the Issue Date;
provided, however, that neither the Company nor any Affiliate of the Company has
held any beneficial interest in such Note, or portion thereof, at any time on or
prior to the second anniversary of the Issue Date and such transfer can
otherwise be lawfully made under the Securities Act without registering such
Initial Notes thereunder or (y) the proposed transferee has delivered to the
Registrar or co-Registrar a certificate substantially in the form of Exhibit D
hereto and any legal opinions and certifications required thereby;
(ii) if the proposed transferor is an Agent Member seeking to
transfer an interest in a Global Note, upon receipt by the Registrar or co-
Registrar of (x) written instructions given in accordance with the Depository's
and the Registrar's or co-Registrar's procedures and (y) the appropriate
certificate, if any, required by clause (y) of paragraph (i) above, together
with any required legal opinions and certifications, the Registrar or co-
Registrar shall register the transfer and reflect on its books and records the
date and a decrease in the principal amount of the Global Note from which such
interests are to be transferred in an amount equal to the principal amount of
the Notes to be transferred and the Company shall execute, each Subsidiary
Guarantor, if any, shall execute a notation on and, upon a Company Order, the
Trustee shall authenticate Physical Notes in a principal amount equal to the
principal amount of the Global Note to be transferred.
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(b) Transfers to Non-U.S. Persons. The following additional
provisions shall apply with respect to the registration of any proposed transfer
of an Initial Note to any Non-U.S. Person:
(i) the Registrar or co-Registrar shall register the transfer of
any Initial Note, whether or not such Note bears the Private Placement Legend,
if (x) the requested transfer is after the second anniversary of the Issue Date;
provided, however, that neither the Company nor any Affiliate of the Company has
held any beneficial interest in such Note, or portion thereof, at any time on or
prior to the second anniversary of the Issue Date and such transfer can
otherwise be lawfully made under the Securities Act without registering such
Initial Notes thereunder or (y) the proposed transferor has delivered to the
Registrar or co-Registrar a certificate substantially in the form of Exhibit E
hereto;
(ii) if the proposed transferee is an Agent Member and the Notes
to be transferred consist of Physical Notes which after transfer are to be
evidenced by an interest in the Regulation S Global Note, upon receipt by the
Registrar or co-Registrar of (x) written instructions given in accordance with
the Depository's and the Registrar's or co-Registrar's procedures and (y) the
appropriate certificate, if any, required by clause (y) of paragraph (i) above,
together with any required legal opinions and certifications, the Registrar or
co-Registrar shall register the transfer and reflect on its books and records
the date and an increase in the principal amount of the Regulation S Global Note
in an amount equal to the principal amount of Physical Notes to be transferred,
and the Trustee shall cancel the Physical Notes so transferred;
(iii) if the proposed transferor is an Agent Member seeking to
transfer an interest in the 144A Global Note, upon receipt by the Registrar or
co-Registrar of (x) written instructions given in accordance with the
Depository's and the Registrar's or co-Registrar's procedures and (y) the
appropriate certificate, if any, required by clause (y) of paragraph (i) above,
together with any required legal opinions and certifications, the Registrar or
co-Registrar shall register the transfer and reflect on its books and records
the date and (A) a decrease in the principal amount of the 144A Global Note from
which such interests are to be transferred in an amount equal to the principal
amount of the Notes to be transferred and (B) an increase in the principal
amount of the Regulation S Global Note in an amount equal to the principal
amount of the 144A Global Note to be transferred; and
(iv) until the 41st day after the Issue Date (the "Restricted
Period"), an owner of a beneficial interest in the Regulation S Global Note may
not transfer such interest to a transferee that is a U.S. Person or for the
account or benefit of a U.S. Person within the meaning of Rule 902(k) of the
Securities Act. During the Restricted Period, all beneficial interests in the
Regulation S Global Note shall be transferred only through Cedel or Euroclear,
either directly if the transferor and transferee are participants in such
systems, or indirectly through organizations that are participants.
(c) Transfers to QIBs. The following provisions shall apply
with respect to the registration of any proposed transfer of an Initial Note to
a QIB (excluding Non-U.S. Persons):
(i) the Registrar or co-Registrar shall register the transfer of
any Initial Note, whether or not such Note bears the Private Placement Legend,
if (x) the requested transfer is after the second anniversary of the Issue Date;
provided, however, that neither the Company nor any Affiliate of the Company has
held any beneficial interest in such Note, or portion thereof, at any time on or
prior to the second anniversary of the Issue Date and such transfer can
otherwise be lawfully made under the Securities Act without registering such
Initial Note thereunder or (y) such transfer is being made by a proposed
transferor who has checked the box provided for on the form of Note stating, or
has otherwise advised the Company and the Registrar or co-Registrar in writing,
that the sale has been made in compliance with the provisions of Rule 144A to a
transferee who has signed the certification provided for on the form of Note
stating, or has otherwise advised the Company and the Registrar or co-Registrar
in writing, that it is purchasing the Note for its own account or an account
with respect to which it exercises sole investment discretion and that it and
any such account is a QIB within the meaning of Rule 144A, and is aware that the
sale to it is being made in reliance on Rule 144A and acknowledges that it has
received such information regarding the Company as it has requested pursuant to
Rule 144A or has determined not to request such information and that it is
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aware that the transferor is relying upon its foregoing representations in order
to claim the exemption from registration provided by Rule 144A;
(ii) if the proposed transferee is an Agent Member and the Notes
to be transferred consist of Physical Notes which after transfer are to be
evidenced by an interest in the 144A Global Note, upon receipt by the Registrar
or co-Registrar of written instructions given in accordance with the
Depository's and the Registrar's or co-Registrar's procedures, the Registrar or
co-Registrar shall register the transfer and reflect on its book and records the
date and an increase in the principal amount of the 144A Global Note in an
amount equal to the principal amount of Physical Notes to be transferred, and
the Trustee shall cancel the Physical Note so transferred; and
(iii) if the proposed transferor is an Agent Member seeking to
transfer an interest in the Regulation S Global Note following the expiration of
the Restricted Period, upon receipt by the Registrar or co-Registrar of written
instructions given in accordance with the Depository's and the Registrar's or
co-Registrar's procedures, the Registrar or co-Registrar shall register the
transfer and reflect on its books and records the date and (A) a decrease in the
principal amount of the Regulation S Global Note in an amount equal to the
principal amount of the Notes to be transferred and (B) an increase in the
principal amount of the 144A Global Note in an amount equal to the principal
amount of the Regulation S Global Note to be transferred.
(d) Private Placement Legend. Upon the registration of transfer,
exchange or replacement of Notes not bearing the Private Placement Legend, the
Registrar or co-Registrar shall deliver Notes that do not bear the Private
Placement Legend. Upon the registration of transfer, exchange or replacement of
Notes bearing the Private Placement Legend, the Registrar or co-Registrar shall
deliver only Notes that bear the Private Placement Legend unless (i) the
circumstances contemplated by paragraph (a)(i)(x) of this Section 3.17 exist,
(ii) there is delivered to the Registrar or co-Registrar an Opinion of Counsel
reasonably satisfactory to the Company and the Trustee to the effect that
neither such legend nor the related restrictions on transfer are required in
order to maintain compliance with the provisions of the Securities Act or (iii)
such Note has been sold pursuant to an effective registration statement under
the Securities Act.
(e) Other Transfers. If a Holder proposes to transfer a Note
constituting a Restricted Note pursuant to any exemption from the registration
requirements of the Securities Act other than as provided for by Section
3.17(a), (b) and (c) hereof, the Registrar or co-Registrar shall only register
such transfer or exchange if such transferor delivers an Opinion of Counsel
satisfactory to the Company and the Registrar or co-Registrar that such transfer
is in compliance with the Securities Act and the terms of this Indenture;
provided, however, that the Company may, based upon the opinion of its counsel,
instruct the Registrar or co-Registrar by a Company Order not to register such
transfer in any case where the proposed transferee is not a QIB, Non-U.S. Person
or Institutional Accredited Investor.
(f) General. By its acceptance of any Note bearing the Private
Placement Legend, each Holder of such a Note acknowledges the restrictions on
transfer of such Note set forth in this Indenture and in the Private Placement
Legend and agrees that it will transfer such Note only as provided in this
Indenture.
The Registrar and each co-Registrar shall retain copies of all
letters, notices and other written communications received pursuant to Section
3.16 hereof or this Section 3.17. The Company shall have the right to inspect
and make copies of all such letters, notices or other written communications at
any reasonable time upon the giving of reasonable prior written notice to the
Registrar or co-Registrar.
ARTICLE FOUR
DEFEASANCE OR COVENANT DEFEASANCE
Section 4.01. Company's Option To Effect Defeasance or Covenant
Defeasance.
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The Company may, at its option by Board Resolution, at any time, with
respect to the Notes, elect to have either Section 4.02 or Section 4.03 hereof
be applied to all of the Outstanding Notes (the "Defeased Notes"), upon
compliance with the conditions set forth below in this Article Four.
Section 4.02. Defeasance and Discharge.
Upon the Company's exercise under Section 4.01 hereof of the option
applicable to the Defeased Notes pursuant to this Section 4.02, the Company
shall be deemed to have been discharged from its obligations with respect to the
Defeased Notes on the date the conditions set forth below are satisfied
(hereinafter, "defeasance"). For this purpose, such defeasance means that the
Company shall be deemed to have paid and discharged the entire indebtedness
represented by the Defeased Notes, which shall thereafter be deemed to be
"Outstanding" only for the purposes of Section 4.05 and the other Sections of
this Indenture referred to in (a) and (b) below, and to have satisfied all its
other obligations under such Notes and this Indenture insofar as such Notes are
concerned (and the Trustee, at the expense of the Company and upon Company
Request, shall execute proper instruments acknowledging the same), except for
the following, which shall survive until otherwise terminated or discharged
hereunder: (a) the rights of Holders of Defeased Notes to receive, solely from
the trust fund described in Section 4.04 hereof and as more fully set forth in
such Section, payments in respect of the principal of, premium, if any, and
interest on such Notes when such payments are due, (b) the Company's obligations
with respect to such Defeased Notes under Sections 3.04, 3.05, 3.06, 10.02 and
10.03 hereof, (c) the rights, powers, trusts, duties and immunities of the
Trustee hereunder, including, without limitation, the Trustee's rights under
Section 6.07 hereof, and (d) this Article Four. Subject to compliance with this
Article Four, the Company may exercise its option applicable to this Section
4.02 notwithstanding the prior exercise of its option applicable to Section
4.03 hereof with respect to the Notes.
Section 4.03. Covenant Defeasance.
Upon the Company's exercise under Section 4.01 hereof of the option
applicable to the Defeased Notes pursuant to this Section 4.03, the Company
shall be released from its obligations under any covenant or provision contained
in Sections 10.06 through 10.22, 10.25 and 10.26 hereof and the provisions of
Article Eight shall not apply, with respect to the Defeased Notes, on and after
the date the conditions set forth below are satisfied (hereinafter, "covenant
defeasance"), and the Defeased Notes shall thereafter be deemed not to be
"Outstanding" for the purposes of any direction, waiver, consent or declaration
or Act of Holders (and the consequences of any thereof) in connection with such
covenants, but shall continue to be deemed "Outstanding" for all other purposes
hereunder. For this purpose, such covenant defeasance means that, with respect
to the Defeased Notes, the Company may omit to comply with and shall have no
liability in respect of any term, condition or limitation set forth in any such
Sections or Article, whether directly or indirectly, by reason of any reference
elsewhere herein to any such Section or Article or by reason of any reference in
any such Section or Article to any other provision herein or in any other
document and such omission to comply shall not constitute a Default or an Event
of Default under Section 5.01(iii) or (iv) hereof, but, except as specified
above, the remainder of this Indenture and such Defeased Notes shall be
unaffected thereby.
Section 4.04. Conditions to Defeasance or Covenant Defeasance.
The following shall be the conditions to application of either Section
4.02 or Section 4.03 hereof to the Defeased Notes:
(1) The Company shall irrevocably have deposited or caused to be
deposited with the Trustee (or another trustee satisfying the requirements
of Section 6.09 hereof who shall agree to comply with the provisions of
this Article Four applicable to it) as trust funds in trust for the purpose
of making the following payments, specifically pledged as security for, and
dedicated solely to, the benefit of the Holders of such Notes, (a) cash (in
United States dollars) in an amount, or (b) Government Securities
(denominated in United States dollars) which through the scheduled payment
of principal, premium, if any, and interest in
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respect thereof in accordance with their terms will provide, not later than
one day before the due date of any payment, money in an amount, or (c) a
combination thereof, in any such case, sufficient, in the opinion of a
nationally recognized firm of independent public accountants expressed in a
written certification thereof delivered to the Trustee, to pay and
discharge, and which shall be applied by the Trustee (or other qualifying
trustee) to pay and discharge, the principal of, premium, if any, and
interest on the Defeased Notes at the Stated Maturity of such principal or
installment of principal, premium, if any, or interest; provided, however,
that the Trustee shall have been irrevocably instructed to apply such cash
or the proceeds of such Government Securities to said payments with respect
to the Notes;
(2) No Default shall have occurred and be continuing on the date of
such deposit (other than a Default or Event of Default with respect to this
Indenture resulting from the incurrence of Indebtedness all or a portion of
which will be used to defease the Notes concurrently with such incurrence)
or, insofar as Section 5.01(vii), (viii) or (ix) hereof is concerned, at
any time during the period ending on the ninety-first day after the date of
such deposit;
(3) Neither the Company nor any Subsidiary of the Company is an
"insolvent person" within the meaning of any applicable Bankruptcy Law on
the date of such deposit or at any time during the period ending on the
ninety-first day after the date of such deposit;
(4) Such defeasance or covenant defeasance shall not cause the Trustee
for the Notes to have a conflicting interest in violation of Section 6.08
hereof and for purposes of the Trust Indenture Act with respect to any
securities of the Company;
(5) Such defeasance or covenant defeasance shall not result in a
breach or violation of, or constitute a default under, this Indenture
(other than as permitted by clause (2) above) or any other material
agreement or instrument to which the Company is a party or by which it is
bound;
(6) In the case of an election under Section 4.02 hereof, the Company
shall have delivered to the Trustee an Opinion of Counsel stating that (x)
the Company has received from, or there has been published by, the Internal
Revenue Service a ruling or (y) since the date hereof, there has been a
change in the applicable Federal income tax law, in either case to the
effect that, and based thereon such opinion shall confirm that, the Holders
of the Outstanding Notes will not recognize income, gain or loss for
Federal income tax purposes as a result of such defeasance and will be
subject to Federal income tax on the same amounts, in the same manner and
at the same times as would have been the case if such defeasance had not
occurred;
(7) In the case of an election under Section 4.03 hereof, the Company
shall have delivered to the Trustee an Opinion of Counsel to the effect
that the Holders of the Outstanding Notes will not recognize income, gain
or loss for Federal income tax purposes as a result of such covenant
defeasance and will be subject to Federal income tax on the same amounts,
in the same manner and at the same times as would have been the case if
such covenant defeasance had not occurred;
(8) The Company shall have delivered to the Trustee an Opinion of
Counsel to the effect that, immediately following the ninety-first day
after the deposit, the trust funds established pursuant to this Article
will not be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally under
any applicable U.S. Federal or state law;
(9) The Company shall have delivered to the Trustee an Officers'
Certificate stating that the deposit made by the Company pursuant to its
election applicable to Section 4.02 or 4.03 hereof was not made by the
Company with the intent of preferring the Holders over the other creditors
of the Company or with the intent of defeating, hindering, delaying or
defrauding creditors of the Company or others;
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(10) The Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that (i) all conditions
precedent (other than conditions requiring the passage of time) provided
for relating to either the defeasance under Section 4.02 or the covenant
defeasance under Section 4.03 (as the case may be) have been complied with
as contemplated by this Section 4.04 and (ii) if any other Indebtedness of
the Company shall then be outstanding or committed, such defeasance or
covenant defeasance will not violate the provisions of the agreements or
instruments evidencing such Indebtedness; and
(11) Such defeasance or covenant defeasance shall not result in a
trust arising from such deposit constituting an "investment company" within
the meaning of the Investment Company Act of 1940, as amended (the
"Investment Company Act").
Opinions required to be delivered under this Section may have such
qualifications as are customary for opinions of the type required and reasonably
acceptable to the Trustee.
Section 4.05. Deposited Money and Government Securities To Be Held in
Trust; Other Miscellaneous Provisions.
Subject to the last paragraph of Section 10.03, all money and
Government Securities (including the proceeds thereof) deposited with the
Trustee (or other qualifying trustee, collectively for purposes of this Section
4.05, the "Trustee") pursuant to Section 4.04 in respect of the Defeased Notes
shall be held in trust and applied by the Trustee, in accordance with the
provisions of such Notes and this Indenture, to the payment, either directly or
through any Paying Agent (other than the Company) as the Trustee may determine,
to the Holders of such Notes of all sums due and to become due thereon in
respect of principal, premium, if any, and interest, but such money need not be
segregated from other funds except to the extent required by law.
The Company shall pay and indemnify the Trustee and hold it harmless
against any tax, fee or other charge imposed on or assessed against the
Government Securities deposited pursuant to Section 4.04 or the principal,
premium, if any, and interest received in respect thereof other than any such
tax, fee or other charge which by law is for the account of the Holders of the
Defeased Notes.
Anything in this Article Four to the contrary notwithstanding, the
Trustee shall deliver or pay to the Company from time to time upon Company
Request any money or Government Securities held by it as provided in Section
4.04 which, in the opinion of an internationally recognized firm of independent
public accountants expressed in a written certification thereof delivered to the
Trustee, are in excess of the amount thereof which would then be required to be
deposited to effect an equivalent defeasance or covenant defeasance.
Section 4.06. Reinstatement.
If the Trustee or Paying Agent is unable to apply any money or
Government Securities in accordance with Section 4.02 or 4.03 hereof, as the
case may be, by reason of any order or judgment of any court or governmental
authority enjoining, restraining or otherwise prohibiting such application, then
the obligations of the Company under this Indenture and the Notes shall be
revived and reinstated as though no deposit had occurred pursuant to Section
4.02 or 4.03 hereof, as the case may be, until such time as the Trustee or
Paying Agent is permitted to apply all such money and Government Securities in
accordance with Section 4.02 or 4.03 hereof, as the case may be; provided,
however, that if the Company makes any payment of principal, premium, if any, or
interest on any Note following the reinstatement of its obligations, the Company
shall be subrogated to the rights of the
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Holders of such Notes to receive such payment from the money and Government
Securities held by the Trustee or Paying Agent.
ARTICLE FIVE
REMEDIES
Section 5.01. Events of Default.
"Event of Default," wherever used herein, means any one of the
following events (whatever the reason for such Event of Default and whether it
shall be voluntary or involuntary or be effected by operation of law or pursuant
to any judgment, decree or order of any court or any order, rule or regulation
of any administrative or governmental body):
(i) default in the payment of interest on the Notes when it becomes
due and payable and continuance of such default for a period of 30 days or
more; or
(ii) default in the payment of the principal of, or premium, if any,
on the Notes when due at maturity, upon redemption or otherwise; or
(iii) default in the performance, or breach, of any covenant
described under Section 10.10, Section 10.15 or Article Eight; or
(iv) default in the performance, or breach, of any covenant in the
Notes, this Indenture (other than defaults specified in clause (i), (ii) or
(iii) above), and continuance of such default or breach for a period of 30
days or more after written notice to the Company by the Trustee or to the
Company and the Trustee by the holders of at least 25% in aggregate
principal amount of the outstanding Notes (in each case, when such notice
is deemed given in accordance with this Indenture); or
(v) (a) failure to pay, following any applicable grace period, any
installment of principal due (whether at maturity or otherwise) under one
or more classes or issues of Indebtedness in an aggregate principal amount
of $7.5 million or more under which the Company or any Restricted
Subsidiary is obligated or (b) failure by the Company or any Restricted
Subsidiary to perform any other term, covenant, condition or provision of
one or more classes or issues of Indebtedness in an aggregate principal
amount of $7.5 million or more under which the Company or such Restricted
Subsidiary is obligated and, in the case of this clause (b), such failure
results in an acceleration of the maturity thereof; or
(vi) one or more judgments, orders or decrees for the payment of
money of $7.5 million or more, either individually or in the aggregate,
shall be entered against the Company or any Restricted Subsidiary or any of
their respective properties and shall not be discharged and there shall
have been a period of 60 consecutive days or more during which a stay of
enforcement of such judgment or order, by reason of pending appeal or
otherwise, shall not be in effect; or
(vii) the Company or any Restricted Subsidiary pursuant to or under
or within the meaning of any Bankruptcy Law:
(A) commences a voluntary case or proceeding;
(B) consents to the entry of a Bankruptcy Order in an
involuntary case or proceeding or the commencement of any case against
it;
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(C) consents to the appointment of a Custodian of it or for any
substantial part of its property;
(D) makes a general assignment for the benefit of its creditors;
(E) files an answer or consent seeking reorganization or relief;
(F) shall admit in writing its inability to pay its debts
generally; or
(G) consents to the filing of a petition in bankruptcy; or
(viii) a court of competent jurisdiction in any involuntary case or
proceeding enters a Bankruptcy Order against the Company or any Restricted
Subsidiary, and such Bankruptcy Order remains unstayed and in effect for 60
consecutive days; or
(ix) a Custodian shall be appointed out of court with respect to
the Company or any Restricted Subsidiary with respect to all or any
substantial part of the assets or properties of the Company or any
Restricted Subsidiary; or
(x) this Indenture or the Registration Rights Agreement ceases to
be in force and effect in all material respects (other than with respect to
the invalidity or alleged invalidity of any provision in the Registration
Rights Agreement regarding indemnification for matters arising under the
federal securities laws) or is declared null and void or the Company denies
that it has any further obligation or liability thereunder or gives notice
to that effect (other than by reason of termination or release in
accordance with the terms thereof).
Section 5.02. Acceleration of Maturity, Rescission and Annulment.
If an Event of Default (other than an Event of Default specified in
clause (vi), (vii), or (viii) of Section 5.01 hereof with respect to the Company
or any Restricted Subsidiary) occurs and is continuing, then the Trustee or the
holders of at least 25% in principal amount of the then Outstanding Notes may,
by written notice, and the Trustee upon the request of the holders of not less
than 25% in principal amount of the then Outstanding Notes shall, declare the
Default Amount of all Outstanding Notes to be immediately due and payable and
upon any such declaration such amount shall become immediately due and payable.
If an Event of Default specified in clause (vi), (vii), or (viii) above with
respect to the Company or any Restricted Subsidiary occurs and is continuing,
then the Default Amount of all outstanding Notes shall ipso facto become and be
immediately due and payable without any declaration or other act on the part of
the Trustee or any holder.
After a declaration of acceleration, the holders of a majority in
aggregate principal amount of the then Outstanding Notes may, by notice to the
Trustee, rescind such declaration of acceleration if all existing Events of
Default, other than nonpayment of the Default Amount of the Notes that has
become due solely as a result of such acceleration, have been cured or waived
and if the rescission of acceleration would not conflict with any judgment or
decree.
Section 5.03. Collection of Indebtedness and Suits for Enforcement by
Trustee.
The Company covenants that, if an Event of Default specified in
Section 5.01(i) or 5.01(ii) shall have occurred and be continuing, then the
Company will, upon demand of the Trustee, pay to the Trustee, for the benefit of
the Holders of such Notes, the whole amount then due and payable on such Notes
for principal, premium, if any, and interest, with interest upon the overdue
principal, premium, if any, and, to the extent that payment of such interest
shall be legally enforceable, upon overdue installments of interest, at the rate
then borne by the Notes; and, in addition thereto, such further amount as shall
be sufficient to cover the costs and expenses of collection,
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including the reasonable compensation, expenses, disbursements and advances of
the Trustee, its agents and counsel.
If the Company fails to pay such amounts forthwith upon such demand,
the Trustee, in its own name and as trustee of an express trust, may, but is not
obligated under this paragraph to, institute a judicial proceeding for the
collection of the sums so due and unpaid and may, but is not obligated under
this paragraph to, prosecute such proceeding to judgment or final decree, and
may, but is not obligated under this paragraph to, enforce the same against the
Company, any Subsidiary Guarantor or any other obligor upon the Notes and
collect the moneys adjudged or decreed to be payable in the manner provided by
law out of the property of the Company, any Subsidiary Guarantor or any other
obligor upon the Notes, wherever situated.
If an Event of Default occurs and is continuing, the Trustee may in
its discretion, but is not obligated under this paragraph to, (i) proceed to
protect and enforce its rights and the rights of the Holders under this
Indenture by such appropriate private or judicial proceedings as the Trustee
shall deem most effectual to protect and enforce such rights, whether for the
specific enforcement of any covenant or agreement contained in this Indenture or
in aid of the exercise of any power granted herein or (ii) proceed to protect
and enforce any other proper remedy. No recovery of any such judgment upon any
property of the Company shall affect or impair any rights, powers or remedies of
the Trustee or the Holders.
Section 5.04. Trustee May File Proofs of Claims.
In case of the pendency of any receivership, insolvency, liquidation,
bankruptcy, reorganization, arrangement, adjustment, composition or other
judicial proceeding relative to the Company, any Subsidiary Guarantor or any
other obligor upon the Notes or the property of the Company, any Subsidiary
Guarantor or of such other obligor or their creditors, the Trustee (irrespective
of whether the principal of the Notes shall then be due and payable as therein
expressed or by declaration or otherwise and irrespective of whether the Trustee
shall have made any demand on the Company or any Subsidiary Guarantor for the
payment of overdue principal or interest) shall be entitled and empowered, by
intervention in such proceeding or otherwise:
(a) to file and prove a claim for the whole amount of principal,
premium, if any, and interest owing and unpaid in respect of the Notes and to
file such other papers or documents as may be necessary or advisable in order to
have the claims of the Trustee (including any claim for the reasonable
compensation, fees, expenses, disbursements and advances of the Trustee, its
agents and counsel) and of the Holders allowed in such judicial proceeding, and
(b) to collect and receive any moneys or other property payable or
deliverable on any such claims and to distribute the same; and any Custodian, in
any such judicial proceeding is hereby authorized by each Holder to make such
payments to the Trustee and, in the event that the Trustee shall consent to the
making of such payments directly to the Holders, to pay the Trustee any amount
due it for the reasonable compensation, expenses, disbursements and advances of
the Trustee, its agents and counsel, and any other amounts due the Trustee under
Section 6.07 hereof.
Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or accept or adopt on behalf of any Holder any plan of
reorganization, arrangement, adjustment or composition affecting the Notes or
the rights of any Holder thereof, or to authorize the Trustee to vote in respect
of the claim of any Holder in any such proceeding.
Section 5.05. Trustee May Enforce Claims Without Possession of Notes.
All rights of action and claims under this Indenture or the Notes may
be prosecuted and enforced by the Trustee without the possession of any of the
Notes or the production thereof in any proceeding relating thereto, and any such
proceeding instituted by the Trustee shall be brought in its own name and as
trustee of an
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express trust, and any recovery of judgment shall, after provision for the
payment of the reasonable compensation, fees, expenses, disbursements and
advances of the Trustee, its agents and counsel, be for the ratable benefit of
the Holders of the Notes in respect of which such judgment has been recovered.
Section 5.06. Application of Money Collected.
Any money collected by the Trustee pursuant to this Article shall be
applied in the following order, at the date or dates fixed by the Trustee and,
in case of the distribution of such money on account of principal, premium, if
any, or interest, upon presentation of the Notes and the notation thereon of the
payment if only partially paid and upon surrender thereof if fully paid:
First: to the Trustee for amounts due under Section 6.07;
Second: to Holders for interest accrued on the Notes, ratably, without
preference or priority of any kind, according to the amounts due and
payable on the Notes for interest;
Third: to Holders for principal and premium, if any, amounts owing
under the Notes, ratably, without preference or priority of any kind,
according to the amounts due and payable on the Notes for principal and
premium, if any; and
Fourth: the balance, if any, to the Company or any other obligor on
the Notes, as their interests may appear, or as a court of competent
jurisdiction may direct.
The Trustee, upon prior written notice to the Company, may fix a
record date and payment date for any payment to Holders pursuant to this Section
5.06.
Section 5.07. Limitation on Suits.
No Holder of any Notes shall have any right to institute any
proceeding, judicial or otherwise, with respect to this Indenture, or for the
appointment of a receiver or trustee, or for any other remedy hereunder, unless
(a) such Holder has previously given written notice to the Trustee of
a continuing Event of Default;
(b) the Holders of not less than 25% in aggregate principal amount of
the then Outstanding Notes shall have made written request to the Trustee to
institute proceedings in respect of such Event of Default in its own name as
Trustee hereunder;
(c) such Holder or Holders have offered to the Trustee reasonable
indemnity against the costs, expenses and liabilities to be incurred in
compliance with such request which is satisfactory to the Trustee;
(d) the Trustee for 60 days after its receipt of such notice, request
and offer of indemnity has failed to institute any such proceeding; and
(e) no direction inconsistent with such written request has been given
to the Trustee during such 60-day period by the Holders of a majority in
aggregate principal amount of the then Outstanding Notes;
it being understood and intended that no one or more Holders shall have any
right in any manner whatever by virtue of, or by availing of, any provision of
this Indenture, any Note or any Subsidiary Guarantee to affect, disturb or
prejudice the rights of any other Holders, or to obtain or to seek to obtain
priority or preference over any other
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Holders or to enforce any right under this Indenture, any Note or any Subsidiary
Guarantee, except in the manner provided in this Indenture and for the equal and
ratable benefit of all the Holders.
Section 5.08. Unconditional Right of Holders To Receive Principal,
Premium and Interest.
Notwithstanding any other provision in this Indenture, the Holder of
any Note shall have the right, which is absolute and unconditional, to receive
cash payment of the principal of, premium, if any, and (subject to Section 3.07
hereof) interest on such Note on the respective Stated Maturities expressed in
such Note (or, in the case of redemption, on the respective Redemption Date) and
to institute suit for the enforcement of any such payment, and such rights shall
not be impaired without the consent of such Holder.
Section 5.09. Restoration of Rights and Remedies.
If the Trustee or any Holder has instituted any proceeding to enforce
any right or remedy under this Indenture or any Note and such proceeding has
been discontinued or abandoned for any reason, or has been determined adversely
to the Trustee or to such Holder, then and in every such case the Company, each
Subsidiary Guarantor, if any, the Trustee and the Holders shall, subject to any
determination in such proceeding, be restored severally and respectively to
their former positions hereunder, and thereafter all rights and remedies of the
Trustee and the Holders shall continue as though no such proceeding had been
instituted.
Section 5.10. Rights and Remedies Cumulative.
Except as provided in Section 3.06, no right or remedy herein
conferred upon or reserved to the Trustee or to the Holders is intended to be
exclusive of any other right or remedy, and every right and remedy shall, to the
extent permitted by law, be cumulative and in addition to every other right and
remedy given hereunder or now or hereafter existing at law or in equity or
otherwise. The assertion or employment of any right or remedy hereunder, or
otherwise, shall not prevent the concurrent assertion or employment of any other
appropriate right or remedy.
Section 5.11. Delay or Omission Not Waiver.
No delay or omission of the Trustee or of any Holder of any Note to
exercise any right or remedy accruing upon any Event of Default shall impair any
such right or remedy or constitute a waiver of any such Event of Default or an
acquiescence therein. Every right and remedy given by this Article Five or by
law to the Trustee or to the Holders may be exercised from time to time, and as
often as may be deemed expedient, by the Trustee or by the Holders, as the case
may be.
Section 5.12. Control by Majority.
The Holders of a majority in aggregate principal amount of the then
Outstanding Notes shall have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee, or exercising
any trust or power conferred on the Trustee, provided, however, that:
(a) such direction shall not be in conflict with any rule of law or
with this Indenture or any Note or expose the Trustee to personal liability;
(b) such direction shall not be unduly prejudicial to the rights of
another Holder; and
(c) the Trustee may take any other action deemed proper by the
Trustee, in its discretion, which is not inconsistent with such direction.
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Section 5.13. Waiver of Past Defaults.
The Holders of not less than a majority in aggregate principal amount
of the then Outstanding Notes by notice to the Trustee may on behalf of the
Holders of all the Notes waive any past Default or Event of Default hereunder
and its consequences, except a Default or Event of Default
(a) in the payment of the principal of, premium, if any, or interest
on any Note, or
(b) in respect of a covenant or provision hereof which under Article
Nine cannot be modified or amended without the consent of the Holder of each
Outstanding Note affected thereby.
Upon any such waiver, such Default shall cease to exist, and any Event
of Default arising therefrom shall be deemed to have been cured, for every
purpose of this Indenture; but no such waiver shall extend to any subsequent or
other Default or Event of Default or impair any right consequent thereon.
Section 5.14. Undertaking for Costs.
All parties to this Indenture agree, and each Holder of any Note by
his acceptance thereof shall be deemed to have agreed, that any court may in its
discretion require, in any suit for the enforcement of any right or remedy under
this Indenture, or in any suit against the Trustee for any action taken,
suffered or omitted by it as Trustee, the filing by any party litigant in such
suit of an undertaking to pay the costs of such suit, and that such court may in
its discretion assess reasonable costs, including reasonable attorneys' fees,
against any party litigant in such suit, having due regard to the merits and
good faith of the claims or defenses made by such party litigant; but the
provisions of this Section 5.14 shall not apply to any suit instituted by the
Trustee, to any suit instituted by any Holder, or group of Holders, holding in
the aggregate more than 10% in aggregate principal amount of the then
Outstanding Notes, or to any suit instituted by any Holder for the enforcement
of the payment of the principal of, premium, if any, or interest on any Note on
or after the respective Stated Maturities expressed in such Note (or, in the
case of redemption, on or after the respective Redemption Dates).
Section 5.15. Waiver of Stay, Extension or Usury Laws.
The Company covenants (to the extent that it may lawfully do so) that
it will not at any time insist upon, or plead, or in any manner whatsoever claim
or take the benefit or advantage of, any stay or extension law or any usury or
other law wherever enacted, now or at any time hereafter in force, which would
prohibit or forgive the Company from paying all or any portion of the principal
of, premium, if any, or interest on the Notes contemplated herein or in the
Notes or which may affect the covenants or the performance of this Indenture;
and the Company (to the extent that it may lawfully do so) hereby expressly
waives all benefit or advantage of any such law, and covenants that it will not
hinder, delay or impede the execution of any power herein granted to the
Trustee, but will suffer and permit the execution of every such power as though
no such law had been enacted.
ARTICLE SIX
THE TRUSTEE
Section 6.01. Certain Duties and Responsibilities.
(a) Except during the continuance of an Event of Default:
(1) the Trustee undertakes to perform such duties and only such duties
as are specifically set forth in this Indenture and the TIA, and no implied
covenants or obligations shall be read into this Indenture against the
Trustee; and
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(2) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the correctness of
the opinions expressed therein, upon certificates (including Officers'
Certificates) or opinions (including Opinions of Counsel) furnished to the
Trustee and conforming to the requirements of this Indenture; but in the
case of any such certificates or opinions which by provision hereof are
specifically required to be furnished to the Trustee, the Trustee shall be
under a duty to examine the same to determine whether or not they conform
to the requirements of this Indenture.
(b) During the continuance of an Event of Default, the Trustee is
required to exercise such rights and powers vested in it under this Indenture
and use the same degree of care and skill in its exercise thereof as a prudent
person would exercise under the circumstances in the conduct of such person's
own affairs.
(c) No provision of this Indenture shall be construed to relieve the
Trustee from liability for its own negligent action, its own negligent failure
to act, or its own willful misconduct, except that no provision of this
Indenture shall require the Trustee to expend or risk its own funds or otherwise
incur any financial liability in the performance of any of its duties hereunder,
or in the exercise of any of its rights or powers, if it shall have reasonable
grounds for believing that repayment of such funds or adequate indemnity against
such risk or liability is not reasonably assured to it.
(d) Whether or not therein expressly so provided, every provision of
this Indenture relating to the conduct or affecting the liability of or
affording protection to the Trustee shall be subject to the provisions of this
Section 6.01.
Section 6.02. Notice of Defaults.
Within 30 days after the occurrence of any Default, the Trustee shall
transmit by mail to all Holders, as their names and addresses appear in the Note
Register, notice of such Default hereunder known to the Trustee, unless such
Default shall have been cured or waived; provided, however, that, except in the
case of a Default or Event of Default in the payment of the principal of,
premium, if any, or interest on any Note or in respect of Article Eight hereof,
the Trustee shall be protected in withholding such notice if and so long as a
trust committee of Responsible Officers of the Trustee in good faith determines
that the withholding of such notice is in the interest of the Holders.
Section 6.03. Certain Rights of Trustee.
Subject to Section 6.01 hereof and the provisions of Section 315 of
the Trust Indenture Act:
(a) the Trustee may rely and shall be protected in acting or
refraining from acting upon any resolution, certificate, statement, instrument,
opinion, report, notice, request, direction, consent, order, bond, debenture,
note, other evidence of indebtedness or other paper or document believed by it
to be genuine and to have been signed or presented by the proper party or
parties;
(b) the Trustee may request that any request or direction of the
Company mentioned herein be sufficiently evidenced by a Company Request or
Company Order and that any resolution of the Board be sufficiently evidenced by
a Board Resolution thereof;
(c) the Trustee may consult with counsel and any written advice of
such counsel or any Opinion of Counsel shall be full and complete authorization
and protection in respect of any action taken, suffered or omitted by it
hereunder in good faith and in reliance thereon in accordance with such advice
or Opinion of Counsel;
(d) the Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by this Indenture at the request or direction of
any of the Holders pursuant to this Indenture, unless such Holders
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shall have offered to the Trustee reasonable security or indemnity against the
costs, expenses and liabilities which might be incurred by the Trustee in
compliance with such request or direction;
(e) the Trustee shall not be liable for any action taken or omitted by
it in good faith and believed by it to be authorized or within the discretion,
rights or powers conferred upon it by this Indenture other than any liabilities
arising out of its own negligence;
(f) the Trustee shall not be bound to make any investigation into the
facts or matters stated in any resolution, certificate, statement, instrument,
opinion, report, notice, request, direction, consent, order, approval,
appraisal, bond, debenture, note, coupon, security, other evidence of
indebtedness or other paper or document unless requested in writing so to do by
the Holders of not less than a majority in aggregate principal amount of the
Notes then Outstanding; provided, however, that, if the payment within a
reasonable time to the Trustee of the costs, expenses or liabilities likely to
be incurred by it in the making of such investigation is, in the opinion of the
Trustee, not reasonably assured to the Trustee by the security afforded to it by
the terms of this Indenture, the Trustee may require reasonable indemnity
against such expenses or liabilities as a condition to proceeding; the
reasonable expenses of every such investigation shall be paid by the Company or,
if paid by the Trustee or any predecessor Trustee, shall be repaid by the
Company upon demand; provided, further, the Trustee in its discretion may make
such further inquiry or investigation into such facts or matters as it may deem
fit, and, if the Trustee shall determine to make such further inquiry or
investigation, it shall be entitled to examine the books, records and premises
of the Company, personally or by agent or attorney;
(g) the Trustee may execute any of the trusts or powers hereunder or
perform any duties hereunder either directly or by or through agents or
attorneys and the Trustee shall not be responsible for any misconduct or
negligence on the part of any agent or attorney appointed with due care by it
hereunder; and
(h) except with respect to Section 10.01, the Trustee shall have no
duty to inquire as to the performance of the Company's covenants in Article Ten.
In addition, the Trustee shall not be deemed to have knowledge of any Default or
Event of Default hereunder except (i) any Event of Default occurring pursuant to
Sections 5.01(i), 5.01(ii) or 10.01 or (ii) any Default or Event of Default of
which a Responsible Officer shall have received written notification or obtained
actual knowledge.
Section 6.04. Trustee Not Responsible for Recitals, Dispositions of
Notes or Application of Proceeds Thereof.
The recitals contained herein and in the Notes, except the Trustee's
certificates of authentication, shall be taken as the statements of the Company,
and the Trustee assumes no responsibility for their correctness. The Trustee
makes no representations as to the validity or sufficiency of this Indenture or
of the Notes, except that the Trustee represents that it is duly authorized to
execute and deliver this Indenture, authenticate the Notes and perform its
obligations hereunder and that the statements to be made by it in any Statement
of Eligibility and Qualification on Form T-1 supplied to the Company will be
true and accurate subject to the qualifications set forth therein. The Trustee
shall not be accountable for the use or application by the Company of Notes or
the proceeds thereof.
Section 6.05. Trustee and Agents May Hold Notes; Collections; Etc.
The Trustee, any Paying Agent, Registrar or co-Registrar or any other
agent of the Company, in its individual or any other capacity, may become the
owner or pledgee of Notes, with the same rights it would have if it were not the
Trustee, Paying Agent, Registrar or co-Registrar or such other agent and,
subject to Section 6.08 hereof and Sections 310 and 311 of the Trust Indenture
Act, may otherwise deal with the Company and receive, collect, hold and retain
collections from the Company with the same rights it would have if it were not
the Trustee, Paying Agent, Registrar or co-Registrar or such other agent.
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Section 6.06. Money Held in Trust.
All moneys received by the Trustee shall, until used or applied as
herein provided, be held in trust for the purposes for which they were
received, but need not be segregated from other funds except to the extent
required herein or by law. The Trustee shall not be under any liability for
interest on any moneys received by it hereunder.
Section 6.07. Compensation and Indemnification of Trustee and Its
Prior Claim.
The Company covenants and agrees: (a) to pay to the Trustee from time
to time, and the Trustee shall be entitled to, reasonable compensation for all
services rendered by it hereunder (which shall not be limited by any provision
of law in regard to the compensation of a trustee of an express trust); (b) to
reimburse the Trustee and each predecessor Trustee upon its request for all
reasonable expenses, fees, disbursements and advances incurred or made by or on
behalf of it in accordance with any of the provisions of this Indenture
(including the reasonable compensation, fees, and the expenses and disbursements
of its counsel and of all agents and other Persons not regularly in its employ),
except any such expense, disbursement or advance as may arise from its
negligence or bad faith; and (c) to indemnify the Trustee and each predecessor
Trustee for, and to hold it harmless against, any loss, liability or expense
incurred without negligence or bad faith on its part, arising out of or in
connection with the acceptance or administration of this Indenture or the trusts
hereunder and its duties hereunder, including enforcement of this Section 6.07.
The obligations of the Company under this Section to compensate and indemnify
the Trustee and each predecessor Trustee and to pay or reimburse the Trustee and
each predecessor Trustee for expenses, fees, disbursements and advances shall
constitute an additional obligation hereunder and shall survive the satisfaction
and discharge of this Indenture. To secure the obligations of the Company to
the Trustee under this Section 6.07, the Trustee shall have a prior Lien upon
all property and funds held or collected by the Trustee as such, except funds
and property paid by the Company and held in trust for the benefit of the
Holders of particular Notes.
Section 6.08. Conflicting Interests.
The Trustee shall be subject to and comply with the provisions of
Section 310(b) of the Trust Indenture Act.
Section 6.09. Corporate Trustee Required; Eligibility.
There shall at all times be a Trustee hereunder which shall be
eligible to act as Trustee under Trust Indenture Act Sections 310(a)(1) and (2)
and which shall have (or, in the case of a Trustee that is an Affiliate of a
bank holding company, its Affiliated bank holding company shall have) a combined
capital and surplus of at least $25,000,000 and a corporate trust office or
agency in the Borough of Manhattan in The City of New York, State of New York.
If such corporation publishes reports of condition at least annually, pursuant
to law or to the requirements of any Federal, state, territorial or District of
Columbia supervising or examining authority, then for the purposes of this
Section, the combined capital and surplus of such corporation shall be deemed to
be its combined capital and surplus as set forth in its most recent report of
condition so published. If at any time the Trustee shall cease to be eligible
in accordance with the provisions of this Section, the Trustee shall resign
immediately in the manner and with the effect hereinafter specified in this
Article.
Section 6.10. Resignation and Removal; Appointment of Successor
Trustee.
(a) No resignation or removal of the Trustee and no appointment of a
successor Trustee pursuant to this Article shall become effective until the
acceptance of appointment by the successor Trustee under Section 6.11.
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(b) The Trustee, or any trustee or trustees hereinafter appointed, may
at any time resign by giving written notice thereof to the Company at least 20
Business Days prior to the date of such proposed resignation. Upon receiving
such notice of resignation, the Company shall promptly appoint a successor
trustee by written instrument executed by authority of the Board, a copy of
which shall be delivered to the resigning Trustee and a copy to the successor
Trustee. If an instrument of acceptance by a successor Trustee shall not have
been delivered to the Trustee within 20 Business Days after the giving of such
notice of resignation, the resigning Trustee may, or (if an instrument of
acceptance by a successor Trustee shall not have been delivered to the Trustee
within 30 Business Days after the giving of such notice of resignation) any
Holder who has been a bona fide Holder of a Note for at least six months may, on
behalf of himself and all others similarly situated, petition any court of
competent jurisdiction for the appointment of a successor Trustee. Such court
may thereupon, after such notice, if any, as it may deem proper, appoint a
successor Trustee.
(c) The Trustee may be removed at any time by an Act of the Holders of
a majority in aggregate principal amount of the then Outstanding Notes,
delivered to the Trustee and to the Company.
(d) If at any time:
(1) the Trustee shall fail to comply with the provisions of Section
310(b) of the Trust Indenture Act in accordance with Section 6.08 hereof
after written request therefor by the Company or by any Holder who has been
a bona fide Holder of a Note for at least six months, or
(2) the Trustee shall cease to be eligible under Section 6.09 hereof
and shall fail to resign after written request therefor by the Company or
by any Holder who has been a bona fide Holder of a Note for at least six
months, or
(3) the Trustee shall become incapable of acting or shall be adjudged
a bankrupt or insolvent, or a receiver of the Trustee or of its property
shall be appointed or any public officer shall take charge or control of
the Trustee or of its property or affairs for the purpose or
rehabilitation, conservation or liquidation,
then, in any case, (i) the Company by a Board Resolution may remove the Trustee,
or (ii) subject to Section 5.14, the Holder of any Note who has been a bona fide
Holder of a Note for at least six months may, on behalf of himself and all
others similarly situated, petition any court of competent jurisdiction for the
removal of the Trustee and the appointment of a successor Trustee. Such court
may thereupon, after such notice, if any, as it may deem proper and prescribe,
remove the Trustee and appoint a successor Trustee.
(e) If the Trustee shall resign, be removed or become incapable of
acting, or if a vacancy shall occur in the office of Trustee for any cause, the
Company, by a Board Resolution, shall promptly appoint a successor Trustee. If,
within one year after such resignation, removal or incapability, or the
occurrence of such vacancy, a successor Trustee shall be appointed by Act of the
Holders of a majority in aggregate principal amount of the then Outstanding
Notes delivered to the Company and the retiring Trustee, the successor Trustee
so appointed shall, forthwith upon its acceptance of such appointment, become
the successor Trustee and supersede the successor Trustee appointed by the
Company. If no successor Trustee shall have been so appointed by the Company or
the Holders of the Notes and accepted appointment in the manner hereinafter
provided, the Holder of any Note who has been a bona fide Holder for at least
six months may, subject to Section 5.14, on behalf of himself and all others
similarly situated, or the resigning Trustee may, petition any court of
competent jurisdiction for the appointment of a successor Trustee.
(f) The Company shall give notice of each resignation and each removal
of the Trustee and each appointment of a successor Trustee by mailing written
notice of such event by first-class mail, postage prepaid, to the Holders of
Notes as their names and addresses appear in the Note Register. Each notice
shall include the name of the successor Trustee and the address of its Corporate
Trust Office.
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Section 6.11. Acceptance of Appointment by Successor.
Every successor Trustee appointed hereunder shall execute, acknowledge
and deliver to the Company and to the retiring Trustee an instrument accepting
such appointment, and thereupon the resignation or removal of the retiring
Trustee shall become effective and such successor Trustee, without any further
act, deed or conveyance, shall become vested with all the rights, powers, trusts
and duties of the retiring Trustee as if originally named as Trustee hereunder;
but, nevertheless, on the written request of the Company or the successor
Trustee, upon payment of amounts due it pursuant to Section 6.07, such retiring
Trustee shall duly assign, transfer and deliver to the successor Trustee all
moneys and property at the time held by it hereunder and shall execute and
deliver an instrument transferring to such successor Trustee all the rights,
powers, duties and obligations of the retiring Trustee. Upon request of any
such successor Trustee, the Company shall execute any and all instruments for
more fully and certainly vesting in and confirming to such successor Trustee all
such rights and powers. Any Trustee ceasing to act shall, nevertheless, retain
a prior claim upon all property or funds held or collected by such Trustee to
secure any amounts then due it pursuant to the provisions of Section 6.07.
No successor Trustee with respect to the Notes shall accept
appointment as provided in this Section 6.11 unless at the time of such
acceptance such successor Trustee shall be eligible to act as Trustee under this
Article.
Upon acceptance of appointment by any successor Trustee as provided in
this Section 6.11, the successor shall give notice thereof to the Holders of the
Notes, by mailing such notice to such Holders at their addresses as they shall
appear on the Note Register. If the acceptance of appointment is substantially
contemporaneous with the resignation, then the notice called for by the
preceding sentence may be combined with the notice called for by Section 6.10.
If the Company fails to give such notice within 10 days after acceptance of
appointment by the successor Trustee, the successor Trustee shall cause such
notice to be given at the expense of the Company.
Section 6.12. Merger, Conversion, Amalgamation, Consolidation or
Succession to Business.
Any corporation into which the Trustee may be merged or converted or
with which it may be consolidated or amalgamated, or any corporation resulting
from any merger, conversion, amalgamation or consolidation to which the Trustee
shall be a party, or any corporation succeeding to all or substantially all of
the corporate trust business of the Trustee (including the trust created by this
Indenture), shall be the successor of the Trustee hereunder without the
execution or filing of any paper or any further act on the part of any of the
parties hereto, provided such corporation shall be eligible under this Article
Six to serve as Trustee hereunder.
In case at the time such successor to the Trustee under this Section
6.12 shall succeed to the trusts created by this Indenture any of the Notes
shall have been authenticated but not delivered, any such successor to the
Trustee may adopt the certificate of authentication of any predecessor Trustee
and deliver such Notes so authenticated; and, in case at that time any of the
Notes shall not have been authenticated, any successor to the Trustee under this
Section 6.12 may authenticate such Notes either in the name of any predecessor
hereunder or in the name of the successor Trustee; and in all such cases such
certificate shall have the full force which it is anywhere in the Notes or in
this Indenture provided that the certificate of the Trustee shall have been
authenticated.
ARTICLE SEVEN'
HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY
Section 7.01. Preservation of Information; Company To Furnish Trustee
Names and Addresses of Holders.
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(a) The Trustee shall preserve the names and addresses of the Holders
and otherwise comply with TIA Section 312(a). If the Trustee is not the
Registrar or co-Registrar, the Company shall furnish or cause the Registrar or
co-Registrar to furnish to the Trustee before each Interest Payment Date, and at
such other times as the Trustee may reasonably request in writing, a list in
such form and as of such date as the Trustee may reasonably require of the names
and addresses of the Holders. Neither the Company nor the Trustee shall be
under any responsibility with regard to the accuracy of such list.
(b) The Company will furnish or cause to be furnished to the
Trustee:
(i) semi-annually, not more than 15 days after each Regular
Record Date, a list, in such form as the Trustee may reasonably require, of
the names and addresses of the Holders as of such Regular Record Date; and
(ii) at such other times as the Trustee may reasonably request in
writing, within 30 days after receipt by the Company of any such request, a
list of similar form and content as of a date not more than 15 days prior
to the time such list is furnished;
provided, however, that if and so long as the Trustee shall be the Registrar or
co-Registrar, no such list need be furnished pursuant to this Subsection
7.01(b).
Section 7.02. Communications of Holders.
Holders may communicate with other Holders with respect to their
rights under this Indenture or under the Notes pursuant to Section 312(b) of the
Trust Indenture Act. The Company and the Trustee and any and all other Persons
benefited by this Indenture shall have the protection afforded by Section 312(c)
of the Trust Indenture Act.
Section 7.03. Reports by Trustee.
Within 60 days after February 15th of each year commencing with the
first February 15th following the date of this Indenture, the Trustee shall mail
to all Holders, as their names and addresses appear in the Note Register, a
brief report dated as of such February 15th, in accordance with and to the
extent required under Section 313 of the Trust Indenture Act. At the time of
its mailing to Holders, a copy of each such report shall be filed by the Trustee
with the Company, the Commission and, if required by the rules of any such stock
exchange or market, with each stock exchange or market on which the Notes are
listed. The Company shall notify the Trustee when the Notes are listed on any
stock exchange or market.
ARTICLE EIGHT
CONSOLIDATION, MERGER, SALE OF ASSETS, ETC.
Section 8.01. Company May Consolidate, etc., Only on Certain Terms.
The Company will not (i) consolidate or combine with or merge with or
into or, directly or indirectly, sell, assign, convey, lease, transfer or
otherwise dispose of all or substantially all of its properties and assets to
any Person or Persons in a single transaction or through a series of
transactions, or (ii) permit any of the Restricted Subsidiaries to enter into
any such transaction or series of transactions if it would result in the
disposition of all or substantially all of the properties or assets of the
Company and the Restricted Subsidiaries on a consolidated basis, unless, in the
case of either (i) or (ii), (a) the Company shall be the continuing Person or,
if the Company is not the continuing Person, the resulting, surviving or
transferee Person (the "surviving entity") shall be a company organized and
existing under the laws of the United States or any State or territory thereof;
(b) the surviving entity (if other than the Company) shall expressly assume all
of the obligations of the Company under the Notes and this
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Indenture, and shall execute a supplemental indenture to effect such assumption
which supplemental indenture shall be delivered to the Trustee and shall be in
form and substance reasonably satisfactory to the Trustee; (c) immediately after
giving effect to such transaction or series of transactions on a pro forma basis
(including, without limitation, any Indebtedness incurred or anticipated to be
incurred in connection with or in respect of such transaction or series of
transactions), (I) the Company or the surviving entity (assuming such surviving
entity's assumption of the Company's obligations under the Notes and this
Indenture), as the case may be, would be able to incur $1.00 of Indebtedness
(other than Permitted Indebtedness) under the proviso of Section 10.11, and (II)
the Company or the surviving entity, as the case may be, would have a
Consolidated Net Worth equal to or greater than the Consolidated Net Worth of
the Company immediately prior to such transaction or series of transactions; (d)
immediately after giving effect to such transaction or series of transactions on
a pro forma basis (including, without limitation, any Indebtedness incurred or
anticipated to be incurred in connection with or in respect of such transaction
or series of transactions), no Default shall have occurred and be continuing;
and (e) the Company or the surviving entity, as the case may be, shall have
delivered to the Trustee an Officers' Certificate and an Opinion of Counsel
stating that such transaction or series of transactions, and, if a supplemental
indenture is required in connection with such transaction or series of
transactions to effectuate such assumption, such supplemental indenture,
complies with this covenant and that all conditions precedent in this Indenture
relating to the transaction or series of transactions have been satisfied.
Section 8.02. Successor Substituted.
Upon any consolidation or merger or any sale, assignment, conveyance,
lease, transfer or other disposition of all or substantially all of the assets
of the Company in accordance with the foregoing in which the Company or the
Restricted Subsidiary, as the case may be, is not the continuing corporation,
then the successor corporation formed by such a consolidation or into which the
Company or such Restricted Subsidiary is merged or to which such transfer is
made, will succeed to, and be substituted for, and may exercise every right and
power of, the Company or such Restricted Subsidiary, as the case may be, under
this Indenture and the Notes with the same effect as if such successor
corporation had been named as the Company or such Restricted Subsidiary therein;
and thereafter, except in the case of (i) any lease or (ii) any sale,
assignment, conveyance, transfer, lease or other disposition to a Restricted
Subsidiary of the Company, the Company shall be discharged from all obligations
and covenants under this Indenture and the Notes.
For all purposes of this Indenture (including the provisions of this
Article Eight and Sections 10.11, 10.13 and 10.16 hereof) and the Notes,
Subsidiaries of any surviving entity will, upon such transaction or series of
related transactions, become Restricted Subsidiaries or Unrestricted
Subsidiaries as provided pursuant to Section 10.20 hereof, and all Indebtedness,
and all Liens on property or assets, of the surviving entity and the Restricted
Subsidiaries (except Indebtedness, or Liens on property or assets of the Company
and the Restricted Subsidiaries in existence immediately prior to such
transaction or series of related transactions) shall be deemed to have been
incurred upon such transaction or series of related transactions.
ARTICLE NINE
SUPPLEMENTAL INDENTURES AND WAIVERS
Section 9.01. Supplemental Indentures, Agreements and Waivers Without
Consent of Holders.
Without the consent of any Holders, the Company and any Subsidiary
Guarantor, when authorized by a Board Resolution, and the Trustee, together, at
any time and from time to time, may amend, waive, modify or supplement this
Indenture or the Notes for any of the following purposes:
(a) to evidence the succession of another Person to the Company, and
the assumption by any such successor of the covenants of the Company in the
Notes and this Indenture;
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(b) to add to the covenants of the Company for the benefit of the
Holders, or to surrender any right or power herein conferred upon the Company in
the Notes or this Indenture;
(c) to cure any ambiguity, or to correct or supplement any provision
in this Indenture or in the Notes which may be defective or inconsistent with
any other provision herein or to make any other provisions with respect to
matters or questions arising under this Indenture or the Notes; provided,
however, that, in each case, such provisions shall not adversely affect the
legal rights of the Holders;
(d) to comply with the requirements of the Commission in order to
effect or maintain the qualification of this Indenture under the Trust Indenture
Act, as contemplated by Section 9.05 hereof or otherwise;
(e) to evidence and provide the acceptance of the appointment of a
successor Trustee hereunder;
(f) to mortgage, pledge, hypothecate or grant a security interest in
any property or assets in favor of the Trustee for the benefit of the Holders as
security for the payment and performance of the Indenture Obligations;
(g) to provide for issuance of the Exchange Notes, which will have
terms substantially identical in all material respects to the Initial Notes
(except that the transfer restrictions contained in the Initial Notes will be
modified or eliminated, as appropriate), and which will be treated together with
any outstanding Initial Notes, as a single issue of securities;
(h) to add or release a Subsidiary Guarantor in compliance with the
provisions of Section 10.22 hereof; or
(i) to make any other change that does not adversely affect in any
material respect the legal rights of any Holder;
provided, however, that the Company has delivered to the Trustee an Opinion of
Counsel stating that such change, agreement or waiver complies with the
provisions of this Section 9.01.
Section 9.02. Supplemental Indentures, Agreements and Waivers with
Consent of Holders.
With the written consent of the Holders of not less than a majority in
aggregate principal amount of the Outstanding Notes delivered to the Company and
the Trustee, the Company, when authorized by a Board Resolution, together with
the Trustee, may amend, waive, modify or supplement any other provision of this
Indenture or the Notes; provided, however, that no such amendment, waiver,
modification or supplement may, without the written consent of the Holder of
each Outstanding Note affected thereby:
(i) reduce the principal amount of, change the fixed maturity
of, or alter the redemption provisions of, the Notes,
(ii) change the currency in which any Notes or amounts owing
thereon is payable,
(iii) reduce the percentage of the aggregate principal amount
Outstanding of Notes which must consent to an amendment, supplement or
waiver or consent to take any action under this Indenture or the Notes,
(iv) impair the right to institute suit for the enforcement of
any payment on or with respect to the Notes,
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(v) waive a Default in payment with respect to the Notes, other
than a waiver consisting of the rescission of any declaration of
acceleration with respect to the Notes effected in compliance with Section
5.02,
(vi) reduce the rate or change the time for payment of interest
on the Notes,
(vii) following the occurrence of a Change of Control or an Asset
Sale, alter the Company's obligation to purchase the Notes in accordance
with this Indenture or waive any Default in the performance thereof, or
(viii) affect the ranking of the Notes in a manner adverse to the
Holders of the Notes.
Upon the written request of the Company accompanied by a Board
Resolution authorizing the execution of any such supplemental indenture or other
agreement, instrument or waiver, and upon the filing with the Trustee of
evidence of the consent of Holders as aforesaid, the Trustee shall join with the
Company in the execution of such supplemental indenture or other agreement,
instrument or waiver.
It shall not be necessary for any Act of Holders under this Section to
approve the particular form of any proposed supplemental indenture or other
agreement, instrument or waiver, but it shall be sufficient if such Act shall
approve the substance thereof.
Section 9.03. Execution of Supplemental Indentures, Agreements and
Waivers.
In executing, or accepting the additional trusts created by, any
supplemental indenture, agreement, instrument or waiver permitted by this
Article Nine or the modifications thereby of the trusts created by this
Indenture, the Trustee shall be entitled to receive, and (subject to Section
6.01 hereof) shall be fully protected in relying upon, an Opinion of Counsel and
an Officers' Certificate from each obligor under the Notes entering into such
supplemental indenture, agreement, instrument or waiver, each stating that the
execution of such supplemental indenture, agreement, instrument or waiver (a) is
authorized or permitted by this Indenture and (b) does not violate the
provisions of any agreement or instrument evidencing any other Indebtedness of
the Company or any other Subsidiary of the Company. The Trustee may, but shall
not be obligated to, enter into any such supplemental indenture, agreement,
instrument or waiver which affects the Trustee's own rights, duties or
immunities under this Indenture, the Notes or otherwise.
Section 9.04. Effect of Supplemental Indentures.
Upon the execution of any supplemental indenture under this Article
Nine, this Indenture and/or the Notes, if applicable, shall be modified in
accordance therewith, and such supplemental indenture shall form a part of this
Indenture and/or the Notes, if applicable, as the case may be, for all purposes;
and every Holder of Notes theretofore or thereafter authenticated and delivered
hereunder shall be bound thereby.
Section 9.05. Conformity with Trust Indenture Act.
Every supplemental indenture executed pursuant to this Article Nine
shall conform to the requirements of the Trust Indenture Act as then in effect.
Section 9.06. Reference in Notes to Supplemental Indentures.
Notes authenticated and delivered after the execution of any
supplemental indenture pursuant to this Article, may, and shall if required by
the Trustee, bear a notation in form approved by the Trustee as to any matter
provided for in such supplemental indenture. If the Company shall so determine,
new Notes so modified as to conform, in the opinion of the Trustee and the
Board, to any such supplemental indenture may be prepared and
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executed by the Company and authenticated and delivered by the Trustee upon a
Company Order in exchange for Outstanding Notes.
In addition, Notes authenticated and delivered after the execution of
any supplemental indenture in compliance with Section 10.22 and this Article
shall, if required by the Trustee, bear a notation substantially in the form
annexed hereto as Annex A to Exhibit B, and new Notes bearing such notation
shall be prepared and executed by the Company, with such notation executed by
the Subsidiary Guarantors, if any . The Trustee, upon a Company Order, shall
thereafter authenticate and deliver such Notes in exchange for Outstanding
Notes.
Section 9.07. Record Date.
The Company may, but shall not be obligated to, fix a record date for
the purpose of determining the Holders entitled to consent to any supplemental
indenture, agreement or instrument or any waiver, and shall promptly notify the
Trustee of any such record date. If a record date is fixed those Persons who
were Holders at such record date (or their duly designated proxies), and only
those Persons, shall be entitled to consent to such supplemental indenture,
agreement or instrument or waiver or to revoke any consent previously given,
whether or not such Persons continue to be Holders after such record date. No
such consent shall be valid or effective for more than 90 days after such record
date.
Section 9.08. Revocation and Effect of Consents.
Until an amendment or waiver becomes effective, a consent to it by a
Holder of a Note is a continuing consent by the Holder and every subsequent
Holder of a Note or portion of a Note that evidences the same debt as the
consenting Holder's Note, even if a notation of the consent is not made on any
Note. However, any such Holder, or subsequent Holder, may revoke the consent as
to his Note or portion of a Note if the Trustee receives the notice of
revocation before the date the amendment or waiver becomes effective. An
amendment or waiver shall become effective in accordance with its terms and
thereafter bind every Holder.
ARTICLE TEN
COVENANTS
Section 10.01. Payment of Principal, Premium and Interest.
The Company will duly and punctually pay the principal of, premium, if
any, and interest on the Notes in accordance with the terms of the Notes, this
Indenture and the Registration Rights Agreement.
Notwithstanding anything to the contrary contained in this Indenture,
the Company may, to the extent it is required to do so by law, deduct or
withhold income or other similar taxes imposed by the United States of America
from principal, premium or interest payments hereunder.
Section 10.02. Maintenance of Office or Agency.
The Company will maintain in the Borough of Manhattan in The City of
New York, State of New York, an office or agency where Notes may be presented or
surrendered for payment, where Notes may be surrendered for registration of
transfer or exchange and where notices and demands to or upon the Company in
respect of the Notes and this Indenture may be served. The office of State
Street Bank and Trust Company, N.A., an Affiliate of the Trustee, at its
Corporate Trust Office will be such office or agency of the Company, unless the
Company shall designate and maintain some other office or agency for one or more
of such purposes. The Company will give prompt written notice to the Trustee of
any change in the location of any such office or agency. If at any time the
Company shall fail to maintain any such required office or agency or shall fail
to furnish the Trustee with the address thereof, such presentations, surrenders,
notices and demands may be made or served at the
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Corporate Trust Office of the Trustee, and the Company hereby appoints the
Trustee as its agent to receive all such presentations, surrenders, notices and
demands.
The Company may also from time to time designate one or more other
offices or agencies (in or outside of The City of New York, State of New York)
where the Notes may be presented or surrendered for any or all such purposes,
and may from time to time rescind such designation; provided, however, that no
such designation or rescission shall in any manner relieve the Company of its
obligation to maintain an office or agency in The City of New York, State of New
York for such purposes. The Company will give prompt written notice to the
Trustee of any such designation or rescission and any change in the location of
any such other office or agency.
Section 10.03. Money for Note Payments To Be Held in Trust.
If the Company shall at any time act as its own Paying Agent, it will,
on or before each due date of the principal of, premium, if any, or interest on
any of the Notes, segregate and hold in trust for the benefit of the Holders
entitled thereto a sum sufficient to pay the principal, premium, if any, or
interest so becoming due until such sums shall be paid to such Persons or
otherwise disposed of as herein provided, and will promptly notify the Trustee
of its action or failure so to act.
If the Company is not acting as Paying Agent, the Company will, prior
to 11:00 a.m. New York City time, on or before each due date of the principal
of, premium, if any, or interest on, any Notes, deposit with a Paying Agent a
sum in same day funds sufficient to pay the principal, premium, if any, or
interest so becoming due, such sum to be held in trust for the benefit of the
Holders entitled to such principal, premium or interest, and (unless such Paying
Agent is the Trustee) the Company will promptly notify the Trustee of such
action or any failure so to act.
If the Company is not acting as Paying Agent, the Company will cause
each Paying Agent other than the Trustee to execute and deliver to the Trustee
an instrument in which such Paying Agent will agree with the Trustee, subject to
the provisions of this Section 10.03, that such Paying Agent will:
(a) hold all sums held by it for the payment of the principal of,
premium, if any, or interest on Notes in trust for the benefit of the Holders
entitled thereto until such sums shall be paid to such Holders or otherwise
disposed of as herein provided;
(b) give the Trustee notice of any Default by the Company (or any
other obligor upon the Notes) in the making of any payment of principal of,
premium, if any, or interest on the Notes;
(c) at any time during the continuance of any such payment Default,
upon the written request of the Trustee, forthwith pay to the Trustee all sums
so held in trust by such Paying Agent; and
(d) acknowledge, accept and agree to comply in all aspects with the
provisions of this Indenture relating to the duties, rights and liabilities of
such Paying Agent.
The Company may at any time, for the purpose of obtaining the
satisfaction and discharge of this Indenture or for any other purpose, pay, or
by Company Order direct any Paying Agent to pay, to the Trustee all sums held in
trust by the Company or such Paying Agent, such sums to be held by the Trustee
upon the same trusts as those upon which such sums were held by the Company or
such Paying Agent; and, upon such payment by any Paying Agent to the Trustee,
such Paying Agent will be released from all further liability with respect to
such money.
Any money deposited with the Trustee or any Paying Agent, or then held
by the Company, in trust for the payment of the principal of, premium, if any,
or interest on any Note and remaining unclaimed for two years after such
principal, premium, if any, or interest has become due and payable shall be paid
to the Company upon
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receipt of a Company Request therefor, or (if then held by the Company) will be
discharged from such trust; and the Holder of such Note will thereafter, as an
unsecured general creditor, look only to the Company for payment thereof, and
all liability of the Trustee or such Paying Agent with respect to such trust
money, and all liability of the Company as trustee thereof, will thereupon
cease; provided, however, that the Trustee or such Paying Agent, before being
required to make any such repayment, may at the expense of the Company cause to
be published once, at the option of the Company in the New York Times or the
Wall Street Journal (national edition), notice that such money remains unclaimed
and that, after a date specified therein, which shall not be less than 30 days
from the date of such publication, any unclaimed balance of such money then
remaining shall be repaid to the Company.
Section 10.04. Corporate Existence.
Subject to Article Eight, the Company will do or cause to be done all
things necessary to preserve and keep in full force and effect the corporate
existence, rights (charter and statutory), licenses and franchises of the
Company and each of the Restricted Subsidiaries; provided, however, that the
Company will not be required to preserve any such right, license or franchise if
the Board shall determine that the preservation thereof is no longer desirable
in the conduct of the business of the Company and the Restricted Subsidiaries
as a whole and that the loss thereof is not adverse in any material respect to
the Holders; provided, further, that the foregoing will not prohibit a sale,
transfer or conveyance of a Restricted Subsidiary of the Company or any of its
assets in compliance with the terms of this Indenture.
Section 10.05. Payment of Taxes and Other Claims.
The Company will pay or discharge or cause to be paid or discharged,
before the same shall become delinquent, (a) all material taxes, assessments and
governmental charges levied or imposed (i) upon the Company or any of the
Restricted Subsidiaries or (ii) upon the income, profits or property of the
Company or any of the Restricted Subsidiaries and (b) all material lawful claims
for labor, materials and supplies, which, if unpaid, could reasonably be
expected to become a Lien upon the property of the Company or any of the
Restricted Subsidiaries; provided, however, that the Company will not be
required to pay or discharge or cause to be paid or discharged any such tax,
assessment, charge or claim (x) whose amount, applicability or validity is being
contested in good faith by appropriate proceedings properly instituted and
diligently conducted or (y) if the failure to so pay, discharge or cause to be
paid or discharged could not reasonably be expected to have a Material Adverse
Effect (as such term is defined in the Purchase Agreement).
Section 10.06. Maintenance of Properties.
The Company will cause all material properties owned by the Company or
any of the Restricted Subsidiaries that are used or held for use in the conduct
of their respective businesses to be maintained and kept in good condition,
repair and working order (subject to ordinary wear and tear) and supplied with
all necessary equipment and will cause to be made all necessary repairs,
renewals, replacements, betterments and improvements thereof, all as in the
judgment of the Company may be necessary so that the business carried on in
connection therewith may be properly and advantageously conducted at all times;
provided, however, that nothing in this Section 10.06 will prevent the Company
from discontinuing the maintenance of any of such properties if such
discontinuance is, in the judgment of the Company, desirable in the conduct of
its business or the business of any of the Restricted Subsidiaries and is not
disadvantageous in any material respect to the Holders.
Section 10.07. Insurance.
The Company will at all times keep all of its and the Restricted
Subsidiaries' properties which are of an insurable nature insured with insurers
(including appropriate self-insurance), believed by the Company in good faith
to be financially sound and responsible, against loss or damage to the extent
that, in the good faith judgment of the Board, property of similar character is
usually and customarily so insured by corporations similarly situated and owning
like properties.
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Section 10.08. Books and Records.
The Company will keep proper books of record and account, in which
full and correct entries will be made of all financial transactions and the
assets and business of the Company and each Restricted Subsidiary of the Company
in compliance with GAAP.
Section 10.09. Provision of Commission Reports.
Whether or not the Company is subject to Section 13(a) or 15(d) of
the Exchange Act or any successor provision of law, the Company shall furnish
without cost to each Holder, and file with the Trustee, (i) within 135 days
after the end of each fiscal year of the Company, financial information with
respect to the Company that would be required to be contained in an Annual
Report on Form 10-K for such year filed by the Company with the Commission
(whether or not the Company is then required to file such Form with the
Commission), including (x) audited financial statements of the Company,
including the report of the Company's independent auditors thereon, and (y) a
discussion of the Company's financial condition and results of operations that
complies with Item 303 of Regulation S-K of the Commission, (ii) within 60 days
after the end of each of the first three fiscal quarters of each fiscal year of
the Company, financial information with respect to the Company that would be
required to be contained in a Quarterly Report on Form 10-Q filed by the Company
with the Commission (whether or not the Company is then required to file such
Form with the Commission), including a discussion of the Company's financial
condition and results of operations that complies with Item 303 of Regulation S-
K of the Commission and (iii) on a timely basis, any information concerning the
Company or any Restricted Subsidiary required to be contained in a Current
Report on Form 8-K (whether or not the Company is then required to file such
Form with the Commission), and, unless such information is included or
incorporated in a Form 10-K, Form 10-Q or Form 8-K filed by the Company with the
Commission, the Company shall file a copy of all such information described in
clauses (i), (ii) and (iii) above with the Commission (if permitted by
Commission practice and applicable law and regulations).
For so long as any Notes remain Outstanding, the Company shall furnish
to securities analysts and prospective investors, upon their request,
information of the type required to be delivered pursuant to Rule 144A(d)(4)
under the Securities Act, and, to any beneficial holder of Notes, if not
obtainable from the Commission, information of the type that would be filed with
the Commission pursuant to the foregoing provisions, upon the request of any
such Holder.
Delivery of the foregoing reports, information and documents to the
Trustee is for informational purposes only and the Trustee's receipt of such
shall not constitute constructive notice of the Trustee of any information
contained therein or determinable from information contained therein, including
the Company's compliance with any of its covenants hereunder (as to which the
Trustee is entitled to rely exclusively on Officers' Certificates).
The Company will also comply with the other provisions of Section
314(a) of the Trust Indenture Act.
Section 10.10. Change of Control.
Upon the occurrence of a Change of Control (the date of such
occurrence being the "Change of Control Date"), the Company shall make an offer
to purchase (the "Change of Control Offer"), on a Business Day (the "Change of
Control Payment Date") not later than 60 days following the Change of Control
Date, all Notes then outstanding at a purchase price equal to 101% of the
principal amount thereof, plus accrued and unpaid interest thereon, if any, to,
such Change of Control Payment Date. Notice of a Change of Control Offer shall
be mailed to holders of Notes not less than 30 days nor more than 60 days before
the Change of Control Payment Date.
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Notice of a Change of Control Offer shall be mailed by the Company to
the Holders at their last registered addresses with a copy to the Trustee and
the Paying Agent. The Change of Control Offer shall remain open from the time
of mailing for at least 20 Business Days and until 5:00 p.m., New York City
time, on the Change of Control Payment Date. The notice, which shall govern the
terms of the Change of Control Offer, shall include such disclosures as are
required by law and shall state:
(a) that the Change of Control Offer is being made pursuant to this
Section 10.10 and that all Notes validly tendered into the Change of Control
Offer and not withdrawn will be accepted for payment;
(b) the purchase price (including the amount of accrued interest, if
any) for each Note, the Change of Control Payment Date and the date on which the
Change of Control Offer expires;
(c) that any Note not tendered for payment will remain Outstanding and
continue to accrue interest in accordance with the terms thereof;
(d) that, unless the Company shall default in the payment of the
purchase price, any Note accepted for payment pursuant to the Change of Control
Offer shall cease to accrue interest after the Change of Control Payment Date;
(e) that Holders electing to have Notes purchased pursuant to a Change
of Control Offer will be required to surrender their Notes to the Paying Agent
at the address specified in the notice prior to 5:00 p.m., New York City time,
on the Change of Control Payment Date and must complete any form letter of
transmittal proposed by the Company and acceptable to the Trustee and the Paying
Agent;
(f) that a Holder that tenders a Note pursuant to a Change of
Control Offer will be entitled to withdraw such Note if the Paying Agent
receives, not later than 5:00 p.m., New York City time, on the Change of Control
Payment Date, a facsimile transmission or letter setting forth the name of such
Holder, the principal amount of Note the Holder tendered for purchase, the Note
certificate number (if any) and a statement that such Holder is withdrawing his
election to have such Note purchased;
(g) that a Holder may tender all or any portion of a Note owned by
such Holder pursuant to the Change of Control Offer, subject to the requirement
that any portion of a Note tendered must be tendered in an integral multiple of
$1,000 in principal amount, and that any Holder that tenders a portion of a Note
will be issued a Note of like tenor equal in principal amount to the portion of
the Note not tendered;
(h) the instructions that Holders must follow in order to tender their
Notes; and
(i) information concerning the business of the Company, the most
recent annual and quarterly reports of the Company filed with the Commission
pursuant to the Exchange Act (or, if the Company is not required to file any
such reports with the Commission at that time, the comparable information
prepared pursuant to Section 10.09), a description of material developments in
the Company's business and such other information concerning the circumstances
and relevant facts regarding such Change of Control and Change of Control Offer
(including, without limitation, pro forma financial information giving effect to
such Change of Control) as would, in the good faith judgment of the Company, be
material to a Holder in connection with the decision of such Holder as to
whether or not it should tender Notes pursuant to the Change of Control Offer.
On the Change of Control Payment Date, the Company shall (i) accept
for payment all Notes, or portions thereof, validly tendered and not withdrawn
pursuant to the Change of Control Offer, (ii) deposit with the Paying Agent
money, in immediately available funds, sufficient to pay the purchase price of
all Notes, or portions thereof, so tendered and accepted and (iii) deliver to
the Trustee the Notes so accepted together with an Officers' Certificate setting
forth the registered numbers of such Notes. The Paying Agent shall, with the
funds so deposited with it by the Company, promptly mail or deliver to each
Holder that validly tendered and did not withdraw Notes,
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or any portion thereof, an amount equal to the purchase price for the portion so
tendered, and the Trustee shall promptly authenticate and mail or deliver to
such Holder a new Note of like tenor equal in principal amount to that portion,
if any, of any Note surrendered by such Holder but not tendered pursuant to the
Change of Control Offer. The Company will publicly announce or otherwise notify
the Holders of the results of the Change of Control Offer as soon as practicable
following the Change of Control Payment Date. The Company shall not be required
to make a Change of Control Offer following a Change of Control if a third party
makes the Change of Control Offer in the manner, at the times and otherwise in
compliance with the requirements applicable to a Change of Control Offer
otherwise required to be made by the Company and purchases all Notes validly
tendered and not withdrawn under such Change of Control Offer.
If the Company is required to make a Change of Control Offer, the
Company (or any such third party) shall comply with all applicable tender offer
laws and regulations, including, to the extent applicable, Section 14(e) and
Rule 14e-1 under the Exchange Act, and any other applicable securities laws and
regulations. To the extent that the provisions of any such securities laws or
regulations conflict with the provisions of this Section 10.10, the Company will
comply with the applicable securities laws and regulations and shall not be
deemed to have breached its obligations under this Section 10.10 solely by
virtue of such compliance.
Section 10.11. Limitation on Additional Indebtedness.
The Company will not, and will not permit any Restricted Subsidiary
to, directly or indirectly, create, incur, assume, issue, Guarantee or in any
manner become directly or indirectly liable for or with respect to, contingently
or otherwise, the payment of (collectively, to "incur") any Indebtedness
(including any Acquired Indebtedness), except for Permitted Indebtedness
(including Acquired Indebtedness to the extent it would constitute Permitted
Indebtedness); provided, that (i) the Company will be permitted to incur
Indebtedness (including Acquired Indebtedness) and (ii) a Restricted Subsidiary
will be permitted to incur Acquired Indebtedness, if, in either case, after
giving pro forma effect to such incurrence (including the application of the net
proceeds therefrom), the Indebtedness to EBITDA Ratio would be less than or
equal to 6 to 1.
Indebtedness of any Person or any of its Subsidiaries existing at the
time such Person becomes a Restricted Subsidiary (or is merged into or
consolidated with the Company or any Restricted Subsidiary), whether or not such
Indebtedness was incurred in connection with, or in contemplation of, such
Person becoming a Restricted Subsidiary (or being merged into or consolidated
with the Company or any Restricted Subsidiary) shall be deemed incurred at the
time such Person becomes a Restricted Subsidiary or merges into or consolidates
with the Company or any Restricted Subsidiary.
For purposes of determining compliance with this Section 10.11, in the
event that an item of Indebtedness may be incurred by meeting the criteria of
one or more items of Permitted Indebtedness, the Company may, in its sole
discretion, classify and divide such item of Indebtedness among more than one of
such items of Permitted Indebtedness.
Accrual of interest, accretion or amortization of original issue
discount and reductions in any collateral described in clause (B) of the
definition of "Indebtedness" by reason of payments of interest on the
Indebtedness secured by such collateral will not be deemed to be an incurrence
of Indebtedness for purposes of this Section 10.11.
Section 10.12. Statement by Officers as to Default.
The Company will deliver to the Trustee, within 120 days after the end
of each fiscal year of the Company ending after the date hereof, a written
statement signed by the chairman or the chief executive officer and by the
principal financial officer or principal accounting officer of the Company,
stating (i) that a review of the activities of the Company during the preceding
fiscal year has been made under the supervision of the signing Officers with a
view to determining whether the Company has kept, observed, performed and
fulfilled its obligations
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under this Indenture, and (ii) that, to the knowledge of each Officer signing
such certificate, the Company has kept, observed, performed and fulfilled in all
material respects each and every covenant and condition contained in this
Indenture and is not in default in the performance or observance of any of the
terms, provisions, conditions and covenants hereof (or, if a Default shall have
occurred, describing all such Defaults of which such Officers have knowledge,
their status and what action the Company is taking or proposes to take with
respect thereto). When any Default under this Indenture has occurred and is
continuing, or if the Trustee or any Holder or the trustee for or the holder of
any other evidence of Indebtedness of the Company or any Restricted Subsidiary
gives any notice or takes any other action with respect to a claimed Default
(other than with respect to Indebtedness (other than Indebtedness evidenced by
the Notes) in the principal amount of less than $5 million), the Company will
promptly notify the Trustee of such Default, notice or action and will deliver
to the Trustee by registered or certified mail or by telegram, or facsimile
transmission followed by hard copy by registered or certified mail an Officers'
Certificate specifying such event, notice or other action within five Business
Days after the Company becomes aware of such occurrence and what action the
Company is taking or proposes to take with respect thereto.
Section 10.13. Limitation on Restricted Payments.
The Company will not, and will not permit any of the Restricted
Subsidiaries to, make, directly or indirectly, any Restricted Payment unless:
(i) no Default shall have occurred and be continuing at the time
of or upon giving effect to such Restricted Payment;
(ii) immediately after giving effect to such Restricted Payment,
the Company would be able to incur $1.00 of Indebtedness under the proviso
of Section 10.11 hereof; and
(iii) immediately after giving effect to such Restricted Payment,
the aggregate amount of all Restricted Payments declared or made on or
after the Issue Date does not exceed an amount equal to the sum of, without
duplication, (a) 50% of Consolidated Net Income accrued on a cumulative
basis during the period beginning on the first day of the first fiscal
quarter immediately subsequent to the Issue Date and ending on the last day
of the fiscal quarter of the Company immediately preceding the date of such
proposed Restricted Payment (or, if such cumulative Consolidated Net Income
of the Company for such period is a deficit, minus 100% of such deficit)
for which financial statements are available, in any event determined by
excluding income resulting from transfers of assets by the Company or a
Restricted Subsidiary to an Unrestricted Subsidiary, plus (b) the aggregate
net cash proceeds received by the Company either (x) as capital
contributions to the Company after May 5, 1998 or (y) from the issuance and
sale of its Capital Stock (other than Disqualified Stock) or options,
warrants or other rights to acquire its Capital Stock (other than
Disqualified Stock), in each case on or after May 5, 1998 to a Person who
is not a Subsidiary of the Company, plus (c) the aggregate net proceeds
received by the Company from the issuance (other than to a Subsidiary of
the Company) on or after May 5, 1998 of its Capital Stock (other than
Disqualified Stock) upon the conversion of, or in exchange for,
Indebtedness of the Company or upon the exercise of options, warrants or
other rights of the Company, plus (d) in the case of the disposition or
repayment (in whole or in part) of any Investment constituting a Restricted
Payment made after the Issue Date, an amount equal to the lesser of the
return of capital with respect to the applicable portion of such Investment
and the cost of the applicable portion of such Investment, in either case,
less the cost of the disposition of such Investment, plus (e) in the case
of any Revocation with respect to a Subsidiary of the Company that was made
subject to a Designation after the Issue Date, an amount equal to the
lesser of the Designation Amount with respect to such Subsidiary or the
Fair Market Value of the Investment of the Company and the Restricted
Subsidiaries in such Subsidiary at the time of Revocation. For purposes of
the preceding clauses (b) (y) and (c), as applicable, (A) the value of the
aggregate net proceeds received by the Company upon the issuance of Capital
Stock either upon the conversion of convertible Indebtedness or in exchange
for outstanding Indebtedness or upon the exercise of options, warrants or
rights will be the net cash proceeds received upon the issuance of such
Indebtedness, options, warrants or rights plus the
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incremental amount received, if any, by the Company upon the conversion,
exchange or exercise thereof, (B) there shall be excluded in all cases any
issuance and sale of Capital Stock financed, directly or indirectly, using
funds (I) borrowed from the Company or any Subsidiary until and to the
extent such borrowing is repaid or (II) contributed, extended, Guaranteed
or advanced by the Company or any Subsidiary (including, without
limitation, direct contributions by the Company in respect of any employee
stock ownership or benefit plan) and (C) there shall be excluded in all
cases any issuance and sale of Capital Stock in one or more Public Equity
Offerings or to Strategic Equity Investors to the extent the net cash
proceeds are used, prior to February 15, 2003, to redeem Notes as permitted
under the optional redemption provisions of the Notes. The Company may not
redeem Notes pursuant to the optional redemption provisions of the Notes
referred to in the immediately preceding sentence from net cash proceeds
received by the Company from the issuance on or after the Issue Date of its
Capital Stock if such net cash proceeds have ever been included in a
determination of the amount of Restricted Payments that may be made by the
Company pursuant to this Section 10.13, unless the Company would have been
able to make such Restricted Payment without including such net cash
proceeds in such determination.
For purposes of determining the amount expended for Restricted
Payments, cash distributed shall be valued at the face amount thereof and
property other than cash shall be valued at its Fair Market Value.
The provisions of this Section 10.13 shall not prohibit the following
(each of which shall be given independent effect):
(1) the payment of any dividend or other distribution within 60 days
after the date of declaration thereof if at such date of declaration such
payment would be permitted by the provisions of this Indenture;
(2) the purchase, redemption, retirement or other acquisition of any
shares of Capital Stock of the Company in exchange for, or out of the net cash
proceeds of the substantially concurrent issue and sale (other than to a
Subsidiary of the Company) of, shares of Capital Stock of the Company (other
than Disqualified Stock); provided that any such net cash proceeds are excluded
from clause (iii)(b) above;
(3) so long as no Default shall have occurred and be continuing, the
purchase, redemption, retirement, defeasance or other acquisition of
Subordinated Indebtedness (A) made by exchange for, or out of the net cash
proceeds of, a substantially concurrent issue and sale (other than to a
Subsidiary of the Company) of (x) Capital Stock (other than Disqualified Stock)
of the Company, provided that any such net cash proceeds are excluded from
clause (iii) (b) above; or (y) other Subordinated Indebtedness to the extent
that (I) its stated maturity for the payment of principal thereof is not prior
to the 91st day after the final Stated Maturity of the Notes, (II) its principal
amount does not exceed the principal amount (or, if such Subordinated
Indebtedness being refinanced provides for an amount less than the principal
amount thereof to be due and payable upon an acceleration thereof, such lesser
amount) of the Subordinated Indebtedness being refinanced, plus any premium
required to be paid in connection with such refinancing pursuant to the terms of
such Subordinated Indebtedness being refinanced, plus the amount of expenses of
the Company incurred in connection with such refinancing, and (III) such new
Subordinated Indebtedness is subordinated to the Notes to the same extent as the
Subordinated Indebtedness being refinanced, or (B) with Unutilized Cash Proceeds
remaining after completion of an Asset Sale pursuant to the fifth paragraph of
Section 10.15 hereof;
(4) so long as no Default shall have occurred and be continuing,
purchases or redemptions of Capital Stock (including cash settlements of stock
options) held by employees, officers or directors upon or following termination
(whether by reason of death, disability or otherwise) of their employment with
the Company or one of its Subsidiaries; provided that payments shall not exceed
$500,000 in any fiscal year in the aggregate;
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(5) payments or distributions to dissenting stockholders pursuant to
applicable law, pursuant to or in contemplation of merger, consolidation or
transfer of assets that complies with the provisions of the Indenture relating
to mergers, consolidations or transfers of substantially all of the assets of
the Company;
(6) any purchase of any fractional share of Common Stock of the
Company in connection with an exercise of the 1998 Warrants and any repurchase
of 1998 Warrants pursuant to a Repurchase Offer (as defined in the 1998 Warrant
Agreement); and
(7) Restricted Payments in addition to those otherwise permitted
pursuant to this Section 10.13 in an aggregate amount not to exceed $10.0
million.
In determining the amount of Restricted Payments permissible under
this Section 10.13, amounts expended pursuant to clauses (1), (4) and (7) above
shall be included, without duplication, as Restricted Payments.
Section 10.14. Limitation on Transactions with Affiliates.
The Company shall not, and shall not permit, cause or suffer any
Restricted Subsidiary to, directly or indirectly, conduct any business, sell,
lease, transfer or otherwise dispose of any of its properties or assets to, or
purchase any property or assets from, or enter into any contract, agreement,
loan, advance or Guarantee or engage in any other transaction (or series of
related transactions which are similar or part of a common plan) with or for the
benefit of any of their respective Affiliates or any beneficial owner of 10% or
more of the Common Stock of the Company or any officer or director of the
Company or any Subsidiary (each, an "Affiliate Transaction"), unless the terms
of the Affiliate Transaction are set forth in writing and are no less favorable
to the Company or such Restricted Subsidiary, as the case may be, than would be
available in a comparable transaction with an unaffiliated third party. Each
Affiliate Transaction (or series of related Affiliate Transactions) involving
aggregate payments and/or other consideration having Fair Market Value (i) in
excess of $1 million shall be approved by a majority of the Board, such approval
to be evidenced by a Board Resolution stating that the Board has determined that
such transaction or transactions comply with the foregoing provisions, (ii) in
excess of $5 million shall further require the approval of a majority of the
Disinterested Directors and (iii) in excess of $10 million shall further require
that the Company obtain a written opinion from an Independent Financial Advisor
stating that the terms of such Affiliate Transaction (or series of related
Affiliate Transactions) are fair to the Company or the Restricted Subsidiary, as
the case may be, from a financial point of view; provided, that this clause
(iii) shall not apply to purchases of goods and/or services in the ordinary
course of the Company's business, and on terms no less favorable to the Company
than those customarily granted to purchasers of such goods and/or services, from
Paradyne Corporation or Xylan Corporation. For purposes of this Section 10.14,
any Affiliate Transaction approved by a majority of the Disinterested Directors
or as to which a written opinion has been obtained from an Independent Financial
Advisor, on the basis set forth in the preceding sentence, shall be deemed to be
on terms that are no less favorable to the Company or such Restricted
Subsidiary, as the case may be, than would be available in a comparable
transaction with an unaffiliated third party and, therefore, shall be permitted
under this Section 10.14.
Notwithstanding the foregoing, the restrictions set forth in this
Section 10.14 shall not apply to (i) transactions with or among, or solely for
the benefit of, the Company and/or any of the Restricted Subsidiaries, provided
that in any such case, no officer, director or beneficial owner of 10% or more
of any class of Capital Stock of the Company shall beneficially own any Capital
Stock of any such Restricted Subsidiary, (ii) transactions pursuant to
agreements and arrangements existing on the Issue Date and specified on a
schedule to the Indenture, (iii) any Restricted Payment made in compliance with
Section 10.13, (iv) the payment of reasonable and customary regular fees to
directors of the Company or any Restricted Subsidiary who are not employees of
the Company or any Restricted Subsidiary, (v) employment agreements, stock
option agreements and indemnification arrangements entered into by the Company
or any of its Restricted Subsidiaries in the ordinary course of business and
consistent with industry practice, (vi) the granting and performance of
registration rights for securities of the Company, (vii) loans and advances to
officers, directors and employees of the Company or any Restricted Subsidiary
for travel,
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entertainment, moving and other relocation expenses, in each case made in the
ordinary course of business and consistent with industry practice, and (viii)
any Permitted Investment.
Section 10.15. Disposition of Proceeds of Asset Sales
The Company will not, and will not permit any Restricted Subsidiary
to, make any Asset Sale unless (a) the Company or such Restricted Subsidiary, as
the case may be, receives consideration at the time of such Asset Sale at least
equal to the Fair Market Value of the shares or assets sold or otherwise
disposed of and (b) at least 75% of such consideration consists of cash or Cash
Equivalents; provided that the following shall be treated as cash for purposes
of this Section 10.15: (x) the amount of any Indebtedness (other than
Subordinated Indebtedness) of the Company or any Restricted Subsidiary that is
actually assumed by the transferee of assets disposed of in such Asset Sale
pursuant to an agreement that fully and unconditionally releases the Company or
such Restricted Subsidiary from further liability ("Assumed Indebtedness") and
(y) the amount of any notes or other obligations that within 30 days of receipt
are converted into cash (to the extent of the cash (after payment of any costs
of disposition) so received). Notwithstanding the immediately preceding
sentence, the Company and its Restricted Subsidiaries may consummate an Asset
Sale without complying with clause (b) of the immediately preceding sentence if
at least 75% of the consideration for such Asset Sale consists of any
combination of cash, Cash Equivalents and Permitted Business Assets (or in
Capital Stock of any Person that will become a Restricted Subsidiary as a result
of such investment if all or substantially all of the properties and assets of
such Person are Permitted Business Assets); provided that any non-cash
consideration (other than Permitted Business Assets received by the Company or
any of its Restricted Subsidiaries in connection with such Asset Sale) that is
converted into or sold or otherwise disposed of for cash or Cash Equivalents
within 365 days after such Asset Sale and any Permitted Business Assets
constituting cash or Cash Equivalents received by the Company or any Restricted
Subsidiary shall constitute Net Cash Proceeds subject to the provisions of this
Section 10.15. The Company or the applicable Restricted Subsidiary, as the case
may be, may (i) apply the Net Cash Proceeds from such Asset Sale, within 365
days of the receipt thereof, to the permanent reduction (whether by means of
repayment, release pursuant to clause (x) of the first sentence of this Section
10.15 or otherwise) of (A) Indebtedness of any Restricted Subsidiary and/or (B)
Indebtedness of the Company ranking senior to or pari passu with the Notes, and,
in each case, permanently reduce the amount of the commitments thereunder by the
amount of the Indebtedness so repaid, and/or (ii) apply such Net Cash Proceeds,
within 365 days of the receipt thereof, to an investment in properties and
assets (including leases of such properties or assets) that will be used or are
usable in the same or a related line of business as that being conducted by the
Company or any Restricted Subsidiary at the time of such Asset Sale or such
investment therein (collectively, "Permitted Business Assets") (or in Capital
Stock of any Person that will become a Restricted Subsidiary as a result of such
investment if all or substantially all of the properties and assets of such
Person are Permitted Business Assets).
To the extent all or part of the Net Cash Proceeds of any Asset Sale
are not applied within 365 days of such Asset Sale as described in clause (i) or
(ii) of the preceding paragraph (such Net Cash Proceeds, the "Unutilized Net
Cash Proceeds"), the Company shall, within 20 Business Days after such 365th
day, make an offer to purchase (an "Asset Sale Offer") all outstanding Notes up
to a maximum principal amount (expressed as a multiple of $1,000) equal to the
Note Pro Rata Share of Unutilized Net Cash Proceeds, at a purchase price in cash
equal to 100% of the principal amount thereof, plus accrued and unpaid interest,
if any, to such purchase date; provided, however, that an Asset Sale Offer may
be deferred by the Company until there are Unutilized Net Cash Proceeds equal to
at least $5.0 million, at which time the entire amount of such Unutilized Net
Cash Proceeds (and not just the amount in excess of $5.0 million) shall be
applied as required pursuant to this paragraph and the next following paragraph.
If any other Indebtedness of the Company which ranks pari passu with
the Notes (the "Other Indebtedness"), including the 1998 Notes and the 1999
Notes, requires that an offer to repurchase such Indebtedness be made upon the
consummation of an Asset Sale, then the Company may apply the Unutilized Net
Cash Proceeds otherwise required to be applied to an Asset Sale Offer to offer
to purchase such Other Indebtedness and to an Asset Sale Offer so long as the
amount of such Unutilized Net Cash Proceeds applied to repurchase the Notes is
not less
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than the Note Pro Rata Share of Unutilized Net Cash Proceeds. Any offer to
purchase such Other Indebtedness shall be made at the same time as the Asset
Sale Offer, and the purchase date in respect of any such offer to purchase and
the Asset Sale Offer shall occur on the same day.
For purposes of this Section 10.15, "Note Pro Rata Share of Unutilized
Net Cash Proceeds" means the amount of the Unutilized Net Cash Proceeds equal to
the product of (x) the Unutilized Net Cash Proceeds and (y) a fraction, the
numerator of which is the aggregate principal amount of, and all accrued
interest thereon to the purchase date on, all Notes (or portions thereof)
validly tendered and not withdrawn pursuant to an Asset Sale Offer related to
such Unutilized Net Cash Proceeds (the "Note Amount") and the denominator of
which is the sum of the Note Amount and the lesser of (i) the aggregate
principal face amount, and all accrued interest thereon to the purchase date, or
(ii) the accreted value as of the purchase date of all Other Indebtedness (or
portions thereof) validly tendered and not withdrawn pursuant to a concurrent
offer to purchase such Other Indebtedness made at the time of such Asset Sale
Offer.
Each Asset Sale Offer shall remain open for a period of 20 Business
Days or such longer period as may be required by law. To the extent that the
principal amount, plus accrued interest thereon, if any, to the payment date, of
Notes validly tendered and not withdrawn pursuant to an Asset Sale Offer is less
than the Unutilized Net Cash Proceeds or the Note Pro Rata Share of Unutilized
Net Cash Proceeds, as the case may be, the Company or any Restricted Subsidiary
may use such excess for general corporate purposes, including the repayment or
repurchase of Indebtedness. If the principal amount, plus accrued interest
thereon, if any, to the payment date, of Notes validly tendered and not
withdrawn by holders thereof exceeds the amount of Notes which can be purchased
with the Unutilized Net Cash Proceeds or the Note Pro Rata Share of Unutilized
Net Cash Proceeds, as the case may be, then the Notes to be purchased will be
selected on a pro rata basis. Upon completion of such Asset Sale Offer and
offer for any Other Indebtedness, the amount of Unutilized Net Cash Proceeds
shall be reset to zero.
Notice of an Asset Sale Offer shall be mailed by the Company not more
than 20 Business Days after the obligation to make such Asset Sale Offer arises
to the Holders of Notes at their last registered addresses with a copy to the
Trustee and the Paying Agent. The Asset Sale Offer shall remain open from the
time of mailing for at least 20 Business Days and until 5:00 p.m., New York City
time, on the date fixed for purchase of Notes validly tendered and not
withdrawn, which date shall be not later than the 30th Business Day following
the mailing of such Asset Sale Offer (the "Asset Sale Offer Purchase Date").
The notice, which shall govern the terms of the Asset Sale Offer, shall include
such disclosures as are required by law and shall state:
(a) that the Asset Sale Offer is being made pursuant to this Section
10.15 and that all Notes validly tendered into the Asset Sale Offer and not
withdrawn will be accepted for payment; provided, however, that if the
aggregate principal amount of Notes tendered in an Asset Sale Offer, plus
accrued interest, if any, thereon to the Asset Sale Offer Purchase Date of
such offer exceeds the aggregate amount of the Note Pro Rata Share of
Unutilized Net Cash Proceeds, the Trustee shall select the Notes to be
purchased on a pro rata basis (with such adjustments as may be deemed
appropriate by the Trustee so that only Notes in denominations of $1,000 or
multiples thereof shall be purchased);
(b) the purchase price (including the amount of accrued interest, if
any) for each Note, the Asset Sale Offer Purchase Date and the date on
which the Asset Sale Offer expires;
(c) that any Note not tendered for payment will remain Outstanding and
continue to accrue interest in accordance with the terms thereof;
(d) that, unless the Company shall default in the payment of the
purchase price, any Note accepted for payment pursuant to the Asset Sale
Offer shall cease to accrue interest after the Asset Sale Offer Purchase
Date;
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(e) that Holders electing to have Notes purchased pursuant to the
Asset Sale Offer will be required to surrender their Notes to the Paying
Agent at the address specified in the notice prior to 5:00 p.m., New York
City time, on the Asset Sale Offer Purchase Date and must complete any form
letter of transmittal proposed by the Company and acceptable to the Trustee
and the Paying Agent;
(f) that a Holder of Notes will be entitled to withdraw its Notes from
the Asset Sale Offer if the Paying Agent receives, not later than 5:00
p.m., New York City time, on the Asset Sale Offer Purchase Date, a
facsimile transmission or letter setting forth the name of such Holder, the
principal amount of each Note such Holder delivered for purchase that such
Holder elects to withdraw, the Note certificate number (if any) and a
statement that such Holder is withdrawing his election to have such Notes
(or a specified portion thereof) purchased;
(g) that Holders whose Notes are purchased only in part will be issued
Notes of like tenor equal in principal amount to the unpurchased portion of
the Notes surrendered;
(h) the instructions that Holders must follow in order to validly
tender their Notes; and
(i) information concerning the business of the Company, the most
recent annual and quarterly reports of the Company filed with the
Commission pursuant to the Exchange Act (or, if the Company is not required
to file any such reports with the Commission at that time, the comparable
information prepared pursuant to Section 10.09), a description of material
developments in the Company's business, and such other information
concerning the circumstances and relevant facts regarding such Asset Sale
(including, without limitation, pro forma financial information giving
effect to such Asset Sale) and Asset Sale Offer as would, in the good faith
judgment of the Company, be material to a Holder of Notes in connection
with the decision of such Holder as to whether or not it should tender
Notes pursuant to the Asset Sale Offer.
On the Asset Sale Offer Purchase Date, the Company shall (i) accept
for payment Notes or portions thereof validly tendered and not withdrawn
pursuant to the Asset Sale Offer, subject to pro ration under the circumstances
and in the manner described in clause (a) of the preceding paragraph, (ii)
deposit with the Paying Agent money, in immediately available funds, sufficient
to pay the purchase price of all Notes or portions thereof so accepted by the
Company and (iii) deliver to the Trustee the Notes so accepted (in whole or in
part) together with an Officers' Certificate setting forth the registered
numbers of such Notes. The Paying Agent shall, with the funds so deposited with
it by the Company, promptly mail or deliver to the Holders of Notes so accepted
payment in an amount equal to the purchase price therefor, and the Trustee shall
promptly authenticate and mail or deliver to such Holders new Notes of like
tenor equal in principal amount to the unpurchased portion of the Notes
surrendered in the Asset Sale Offer and not purchased by the Company. The
Company will publicly announce or otherwise notify the Holders of the results of
the Asset Sale Offer as promptly as practicable following the Asset Sale Offer
Purchase Date.
If the Company is required to make an Asset Sale Offer, the Company
shall comply with all applicable tender offer rules, including to the extent
applicable, Section 14(e) and Rule 14e-1 under the Exchange Act, and any other
applicable securities laws and regulations. To the extent that the provisions
of any such securities laws or regulations conflict with the provisions of this
Section 10.15, the Company will comply with the applicable securities laws and
regulations and shall not be deemed to have breached its obligations under this
Section 10.15 solely by virtue of such compliance.
Section 10.16. Limitation on Liens Securing Certain Indebtedness.
The Company will not, and will not permit any Restricted Subsidiary
to, create, incur, assume or suffer to exist any Liens of any kind against or
upon any of the property or assets of the Company or any Restricted Subsidiary,
whether now owned or hereafter acquired, or any proceeds therefrom, which secure
either (x)
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Subordinated Indebtedness, unless the Notes are secured by a Lien on such
property, assets or proceeds that is senior in priority to the Liens securing
such Subordinated Indebtedness, or (y) Indebtedness of (A) the Company that is
not Subordinated Indebtedness, or (B) any Restricted Subsidiary, unless in each
case the Notes are equally and ratably secured with the Liens securing such
other Indebtedness, except, in the case of clauses (x) and (y), for Permitted
Liens and for Liens to secure Debt Securities on cash representing the proceeds
of such Debt Securities or on Government Securities acquired with such cash and
pledged for the purpose of providing for the payment of principal of, and/or
interest on, such Debt Securities.
Section 10.17. Limitation on Status as Investment Company.
The Company will not, and will not permit any of its Subsidiaries or
Affiliates to, conduct its business in a fashion that would cause the Company to
be required to register as an "investment company" (as that term is defined in
the Investment Company Act), or otherwise become subject to regulation under the
Investment Company Act. For purposes of establishing the Company's compliance
with this provision, any exemption that is or would become available under
Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act will be
disregarded.
Section 10.18. Limitation on Issuances and Sales of Capital Stock of
Restricted Subsidiaries.
The Company will not sell, and will not permit any Restricted
Subsidiary, directly or indirectly, to issue or sell any shares of Capital Stock
(or any options, warrants or other rights to purchase such Capital Stock) of a
Restricted Subsidiary, except (i) any sale or issuance of Capital Stock to the
Company or a Wholly Owned Restricted Subsidiary, (ii) any sale or issuance of
Common Stock to directors as director qualifying shares, but only to the extent
required under applicable law, (iii) any sale or other disposition of all, but
not less than all, of the issued and outstanding Capital Stock of any Restricted
Subsidiary owned by the Company and the Restricted Subsidiaries or (iv) any sale
or issuance of Capital Stock of a Restricted Subsidiary (other than pursuant to
clauses (i) or (ii)) if such Restricted Subsidiary would no longer be a
Restricted Subsidiary immediately after such transaction and any Investment in
such Person remaining after giving effect to such sale or issuance would have
been permitted to be made under Section 10.13 hereof, and, in the case of both
(iii) and (iv), in compliance with Section 10.15 hereof.
Section 10.19. Limitation on Dividends and Other Payment Restrictions
Affecting Restricted Subsidiaries.
The Company will not, and will not permit any Restricted Subsidiary
to, directly or indirectly, create or otherwise enter into or cause to become
effective any encumbrance or restriction of any kind on the ability of any
Restricted Subsidiary to (a) pay dividends, in cash or otherwise, or make any
other distributions on its Capital Stock or any other interest or participation
in, or measured by, its profits to the extent owned by the Company or any
Restricted Subsidiary, (b) pay any Indebtedness owed to the Company or any
Restricted Subsidiary, (c) make any Investment in the Company or any Restricted
Subsidiary or (d) transfer any of its properties or assets to the Company or to
any Restricted Subsidiary, except for (i) any encumbrance or restriction in
existence on the Issue Date, (ii) customary non-assignment provisions, (iii) any
encumbrances or restriction pertaining to an asset subject to a Lien to the
extent set forth in the security documentation governing such Lien, (iv) any
encumbrance or restriction applicable to a Restricted Subsidiary at the time
that it becomes a Restricted Subsidiary that is not created in contemplation
thereof, (v) any encumbrance or restriction existing under any agreement that
refinances or replaces an agreement containing a restriction permitted by clause
(iv) above; provided that the terms and conditions of any such encumbrance or
restriction are not materially less favorable to the holders of Notes than those
under or pursuant to the agreement being replaced or the agreement evidencing
the Indebtedness refinanced, (vi) any encumbrance or restriction imposed upon a
Restricted Subsidiary pursuant to an agreement which has been entered into for
the sale or disposition of all or substantially all of the Capital Stock or
assets of such Restricted Subsidiary or any Asset Sale to the extent limited to
the Capital Stock or assets in question, and (vii) any customary encumbrance or
restriction applicable to a Restricted Subsidiary that is contained in an
agreement or instrument
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governing or relating to Permitted Indebtedness contained in any Debt Securities
or Permitted Credit Facility; provided that the terms and conditions of any such
encumbrance or restriction contained in any Debt Securities are no more
restrictive than those contained in this Indenture; provided, further, that
(subject to customary net worth, leverage, invested capital and other financial
covenants and the absence of default under such agreement or instrument) the
provisions of such agreement or instrument permit the payment of interest and
principal and mandatory repurchases pursuant to the terms of this Indenture and
the Notes and other Indebtedness (other than Subordinated Indebtedness) that is
solely an obligation of the Company; and provided, further, that such agreement
or instrument may contain customary covenants regarding the merger of or sale of
all or any substantial part of the assets of the Company or any Restricted
Subsidiary, customary restrictions on transactions with affiliates and customary
subordination provisions governing indebtedness owed to the Company or any
Restricted Subsidiary.
Section 10.20. Limitation on Designations of Unrestricted
Subsidiaries.
The Company will not designate any Subsidiary of the Company (other
than a newly created Subsidiary in which the Company has made an Investment of
$1,000 or less) as an "Unrestricted Subsidiary" under this Indenture (a
"Designation") unless:
(a) no Default shall have occurred and be continuing at the time of or
after giving effect to such Designation; and
(b) the Company would be permitted under this Indenture to make an
Investment at the time of such Designation (assuming the effectiveness of
such Designation) in an amount (the "Designation Amount") equal to the Fair
Market Value of the interest of the Company and its Restricted Subsidiaries
in such Subsidiary on such date.
In the event of any such Designation, the Company shall be deemed to
have made an Investment constituting a Restricted Payment pursuant to Section
10.13 hereof for all purposes of this Indenture in an amount equal to the
Designation Amount. Neither the Company nor any Restricted Subsidiary shall at
any time (x) provide a Guarantee of, or similar credit support for, or subject
any of its properties or assets (other than the Capital Stock of any
Unrestricted Subsidiary) to the satisfaction of, any Indebtedness of any
Unrestricted Subsidiary (including any undertaking, agreement or instrument
evidencing such Indebtedness), (y) be directly or indirectly liable for any
Indebtedness of any Unrestricted Subsidiary or (z) be directly or indirectly
liable for any other Indebtedness which provides that the holder thereof may
(upon notice, lapse of time or both) declare a default thereon (or cause the
payment thereof to be accelerated or payable prior to its final scheduled
maturity) upon the occurrence of a default with respect to any other
Indebtedness that is Indebtedness of an Unrestricted Subsidiary (including any
corresponding right to take enforcement action against such Unrestricted
Subsidiary), except in the case of clause (x) or (y) to the extent otherwise
permitted under this Indenture, including without limitation under Section 10.13
hereof.
The Company will not revoke any Designation of a Subsidiary as an
Unrestricted Subsidiary (a "Revocation") unless:
(a) no Default shall have occurred and be continuing at the time of
and after giving effect to such Revocation; and
(b) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately following such Revocation would, if incurred at
such time, have been permitted to be incurred for all purposes of this
Indenture.
All Designations and Revocations must be evidenced by Board
Resolutions and Officers' Certificates delivered to the Trustee certifying
compliance with the foregoing provisions.
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Section 10.21. Compliance Certificates and Opinions.
Upon any application or request by the Company to the Trustee to take
any action under any provision of this Indenture, the Company, each Subsidiary
Guarantor, if any, and any other obligor on the Notes will furnish to the
Trustee an Officers' Certificate stating that all conditions precedent, if any,
provided for in this Indenture (including any covenants compliance with which
constitutes a condition precedent) relating to the proposed action have been
complied with, and an Opinion of Counsel stating that in the opinion of such
counsel all such conditions precedent, if any, have been complied with, except
that, in the case of any such application or request as to which the furnishing
of such documents, certificates and/or opinions is specifically required by any
provision of this Indenture relating to such particular application or request,
no additional certificate or opinion need be furnished.
Every Officers' Certificate or Opinion of Counsel with respect to
compliance with a condition or covenant provided for in this Indenture will
include:
(i) a statement that each individual signing such certificate or
opinion has read such covenant or condition and the definitions herein
relating thereto;
(ii) a brief statement as to the nature and scope of the examination
or investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(iii) a statement that, in the opinion of each such individual, he
has made such examination or investigation as is necessary to enable him to
express an informed opinion as to whether such covenant or condition has
been complied with; and
(iv) a statement as to whether, in the opinion of each such
individual, such condition or covenant has been complied with.
Section 10.22. Limitation on Issuances of Guarantees by Restricted
Subsidiaries.
The Company will not permit any Restricted Subsidiary, directly or
indirectly, to Guarantee the payment of any other Indebtedness of the Company
unless such Restricted Subsidiary simultaneously executes and delivers a
supplemental indenture to the Indenture providing for the Guarantee of the
payment of the Notes by such Restricted Subsidiary (a "Subsidiary Guarantee"),
which Subsidiary Guarantee shall be senior to or pari passu with such Restricted
Subsidiary's Guarantee of such other Indebtedness; provided that this paragraph
shall not apply to any Guarantee of Indebtedness described in clause (h) of the
definition of "Permitted Indebtedness." Notwithstanding the foregoing, any such
Subsidiary Guarantee shall provide by its terms that it shall be automatically
and unconditionally released and discharged upon (i) any sale, exchange or
transfer, to any Person not an Affiliate of the Company, of all of the Company's
stock in, or all or substantially all the assets of, such Restricted Subsidiary,
which sale, exchange or transfer is made in compliance with the applicable
provisions of the Indenture, (ii) the Designation of such Restricted Subsidiary
as an Unrestricted Subsidiary in compliance with Section 10.20 hereof or (iii)
the release of such Restricted Subsidiary from all of its obligations under all
of its Guarantees of Indebtedness of the Company. A form of such Subsidiary
Guarantee is set forth as Exhibit B hereto.
At the time of the delivery to the Trustee of a Subsidiary Guarantee
by a Restricted Subsidiary pursuant to this Section 10.22, such Restricted
Subsidiary shall also deliver to the Trustee an Opinion of Counsel and Officers'
Certificate to the effect that such Subsidiary Guarantee has been duly
authorized and executed by such Restricted Subsidiary and constitutes the legal,
valid, binding and enforceable obligations of such Restricted Subsidiary
(subject to applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and similar laws affecting creditors' rights and
remedies generally).
Section 10.23. Registration Rights
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(a) Simultaneously with the execution and delivery of this Indenture,
the Company shall enter into the Registration Rights Agreement.
(b) In the event that (a) the Exchange Offer Registration Statement is
not filed with the Commission on or prior to the 90th calendar day following the
Closing Time, (b) the Exchange Offer Registration Statement is not declared
effective on or prior to the 150th calendar day following the Closing Time, (c)
the Exchange Offer is not consummated on or prior to the 30th calendar day after
the date on which the Exchange Offer Registration Statement is declared
effective, (d) if required under the Registration Rights Agreement, a Shelf
Registration Statement with respect to the Notes is not declared effective on or
prior to the 60th calendar day following the date on which the obligation to
file such registration statement arises or (e) the Exchange Offer Registration
Statement or the Shelf Registration Statement is declared effective but
thereafter ceases to be effective or usable except in accordance with Section
2(d)(iii) of the Registration Rights Agreement (each such event referred to in
clauses (a) through (e) above, a "Registration Default"), then the Company shall
pay as liquidated damages interest ("Additional Interest") on the Restricted
Notes as to which the Registration Default exists. If a Registration Default
exists with respect to Restricted Notes, the Company will, with respect to the
first 90-day period (or portion thereof) while such Registration Default is
continuing immediately following the occurrence of such Registration Default,
make cash payments at a rate of 0.50% per annum multiplied by the principal
amount of the Restricted Notes as of the date such payment is required to be
made. The rate of such cash payment shall increase by an additional 0.50% per
annum at the beginning of each subsequent 90-day period (or portion thereof)
while such Registration Default is continuing until such Registration Default is
cured, up to a maximum rate of 1.5% per annum. Upon the cure of a Registration
Default in accordance with Section 2(e) of the Registration Rights Agreement,
the accrual of Additional Interest on the Restricted Notes with respect to such
Registration Default will cease.
Additional Interest shall be computed based on the actual number of
days elapsed in each 90-day period in which Additional Interest accrues on the
Notes.
The Company shall notify the Trustee within three Business Days after
the occurrence of each Registration Default. Additional Interest payable with
respect to any Restricted Note shall be due and payable on each February 15 and
August 15 (each an "Additional Interest Payment Date") if Additional Interest
has accrued on such Restricted Note during the semi-annual period immediately
preceding such Additional Interest Payment Date, to the Person in whose name
such Restricted Note (or one or more Predecessor Notes) is registered at the
close of business on the February 1 or August 1, whether or not a Business Day,
next preceding such Additional Interest Payment Date. Each obligation to pay
Additional Interest shall be deemed to accrue from and including the day
following the occurrence of the applicable Registration Default. Additional
Interest shall be paid by depositing with the Trustee, in trust for the benefit
of the Holders of Notes, prior to 11:00 a.m. New York City time on the
applicable Additional Interest Payment Date, immediately available funds
sufficient to pay the Additional Interest then due.
Section 10.24. Intentionally Omitted.
Section 10.25. Business Activities.
The Company shall not, and shall not permit any Restricted Subsidiary
to, engage in any business other than the Permitted Business.
Section 10.26. Limitation on Sale/Leaseback Transactions.
The Company shall not, and shall not permit its Restricted
Subsidiaries to, directly or indirectly, enter into, assume, Guarantee or
otherwise become liable with respect to any Sale/Leaseback Transaction.
However, the Company or any Restricted Subsidiary may enter into any such
transaction if (i) the Company or such Restricted Subsidiary would be permitted
under Sections 10.11 and 10.16 hereof to incur secured Indebtedness in an
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amount equal to the Attributable Debt with respect to such transaction; (ii) the
consideration received by the Company or such Restricted Subsidiary from such
transaction is at least equal to the Fair Market Value of the property being
transferred; and (iii) to the extent that such transaction constitutes an Asset
Sale, the Net Cash Proceeds received by the Company or such Restricted
Subsidiary from such transaction are applied in accordance with Section 10.15
hereof.
ARTICLE ELEVEN
SATISFACTION AND DISCHARGE
Section 11.01. Satisfaction and Discharge of Indenture.
This Indenture shall be discharged and will cease to be of further
effect (except as to surviving rights or registration of transfer or exchange of
Notes herein expressly provided for) as to all outstanding Notes and the
Trustee, on written demand of and at the expense of the Company, shall execute
proper instruments acknowledging satisfaction and discharge of this Indenture,
when either
(a) all Notes theretofore authenticated and delivered (other than (A)
Notes which have been destroyed, lost or stolen and which have been
replaced or paid as provided in Section 3.06 hereof and (B) Notes for whose
payment money has theretofore been deposited in trust or segregated and
held in trust by the Company and thereafter repaid to the Company or
discharged from such trust, as provided in Section 10.03) have been
delivered to the Trustee for cancellation; or
(b) (i) all such Notes not theretofore delivered to the Trustee for
cancellation have become due and payable and the Company has irrevocably
deposited or caused to be deposited with the Trustee in trust an amount of
money in dollars sufficient to pay and discharge the entire Indebtedness on
such Notes not theretofore delivered to the Trustee for cancellation, for
the principal of, premium, if any, and interest to the date of such
deposit;
(ii) the Company has paid or caused to be paid all other sums
payable hereunder by the Company; and
(iii) the Company has delivered to the Trustee (A) irrevocable
instructions to apply the deposited money toward payment of the Notes at
the Stated Maturities and the Redemption Dates thereof, and (B) an
Officers' Certificate and an Opinion of Counsel each stating that all
conditions precedent herein provided for relating to the satisfaction and
discharge of this Indenture have been complied with.
Notwithstanding the satisfaction and discharge of this Indenture, the
obligations of the Company to the Trustee under Section 6.07 and, if money shall
have been deposited with the Trustee pursuant to subclause (b)(ii) of this
Section 11.01, the obligations of the Trustee under Section 11.02 and the last
paragraph of Section 10.03, shall survive.
Section 11.02. Application of Trust Money.
Subject to the provisions of the last paragraph of Section 10.03, all
money deposited with the Trustee pursuant to Section 11.01 shall be held in
trust and applied by it, in accordance with the provisions of the Notes and this
Indenture, to the payment, either directly or through any Paying Agent
(including the Company acting as its own Paying Agent) as the Trustee may
determine, to the Persons entitled thereto, of the principal of, premium, if
any, on and interest on the Notes for whose payment such money has been
deposited with the Trustee.
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ARTICLE TWELVE
REDEMPTION
Section 12.01. Notices to the Trustee.
If the Company elects to redeem Notes pursuant to Paragraph 3 of the
reverse side of the Initial Notes or Paragraph 2 of the reverse side of the
Exchange Notes, it shall notify the Trustee of the Redemption Date, the
Redemption Price and the principal amount of Notes to be redeemed.
The Company shall notify the Trustee of any redemption at least 45
days before the Redemption Date (or such shorter time as may be acceptable to
the Trustee) by an Officers' Certificate, stating that such redemption will
comply with the provisions hereof and of the Notes; provided that, if the Notes
and the 1998 Notes and/or the 1999 Notes are to be redeemed simultaneously, any
notice given in compliance with the indenture governing the 1998 Notes and/or
the 1999 Notes shall be acceptable to the Trustee.
Section 12.02. Selection of Notes To Be Redeemed.
In the event that less than all of the Notes are to be redeemed at any
time, selection of such Notes for redemption will be made by the Trustee in
compliance with any applicable requirements of the principal national securities
exchange, if any, on which the Notes are listed or, if the Notes are not then
listed on a national securities exchange (or if the Notes are so listed but the
exchange does not impose requirements with respect to the selection of debt
securities for redemption), by such method as the Trustee in its sole discretion
shall deem fair and appropriate; provided, however, that any redemption pursuant
to the provisions relating to redemptions from the proceeds of (a) one or more
Public Equity Offerings and/or (b) the sale of Capital Stock (other than
Disqualified Stock) to Strategic Equity Investors shall be made on a pro rata
basis or on as nearly a pro rata basis as practicable (subject to the
Depository's procedures). No Notes of a principal amount of $1,000 or less
shall be redeemed in part.
The Trustee shall promptly notify the Company and the Registrar and
each co-Registrar in writing of the Notes selected for redemption and, in the
case of any Notes selected for partial redemption, the principal amount thereof
to be redeemed.
For all purposes of this Indenture, unless the context otherwise
requires, all provisions relating to redemption of Notes shall relate, in the
case of any Note redeemed or to be redeemed only in part, to the portion of the
principal amount of such Note which has been or is to be redeemed.
Section 12.03. Notice of Redemption.
Notice of redemption shall be given by first-class mail, postage
prepaid, mailed not less than 30 nor more than 60 days prior to the Redemption
Date, to each Holder of Notes to be redeemed, at the address of such Holder
appearing in the Note Register maintained by the Registrar or co-Registrar.
All notices of redemption shall identify the Notes to be redeemed and
shall state:
(a) the Redemption Date;
(b) the Redemption Price;
(c) that, unless the Company defaults in paying the Redemption Price,
any Note called for redemption shall cease to accrue interest on and after
the Redemption Date, and the only remaining right of
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the Holders of such Notes is to receive payment of the Redemption Price
upon surrender to the Paying Agent of the Notes redeemed;
(d) if any Note is to be redeemed in part, the portion of the
principal amount (equal to $1,000 or any integral multiple thereof) of such
Note to be redeemed and that on and after the Redemption Date, upon
surrender for cancellation of such Note to the Paying Agent, a new Note or
Notes in the aggregate principal amount equal to the unredeemed portion
thereof will be issued without charge to the Holder;
(e) that Notes called for redemption must be surrendered to the Paying
Agent to collect the Redemption Price and the name and address of the
Paying Agent; and
(f) the CUSIP or CINS number, if any, relating to such Notes.
Notice of redemption of Notes to be redeemed at the election of the
Company shall be given by the Company or, at the Company's written request given
with sufficient advance notice to permit the Trustee to adequately respond, by
the Trustee in the name and at the expense of the Company.
Section 12.04. Effect of Notice of Redemption.
Once notice of redemption is mailed, Notes called for redemption
become due and payable on the Redemption Date and at the Redemption Price. Upon
surrender to the Paying Agent, such Notes called for redemption shall be paid at
the Redemption Price (including accrued interest, if any, to the Redemption
Date), but interest installments whose Stated Maturity is on or prior to such
Redemption Date will be payable on the relevant Interest Payment Dates to the
Holders of record at the close of business on the relevant Regular Record Dates
referred to in the Notes.
Section 12.05. Deposit of Redemption Price.
On or prior to 11:00 a.m. New York City time on any Redemption Date,
the Company shall deposit with the Paying Agent an amount of money in same day
funds sufficient to pay the Redemption Price of all the Notes or portions
thereof which are to be redeemed on that date (including any accrued interest to
the Redemption Date), other than Notes or portions thereof called for redemption
on that date which have been delivered by the Company to the Trustee for
cancellation.
If the Company complies with the preceding paragraph, then, unless the
Company defaults in the payment of such Redemption Price, any Note called for
redemption shall cease to accrue interest on and after the applicable Redemption
Date, whether or not such notes are presented for payment, and the only
remaining right of the Holders of such Notes is to receive payment of the
Redemption Price upon surrender to the Paying Agent of the Notes. If any Note
called for redemption shall not be so paid upon surrender thereof for
redemption, the principal, premium, if any, and, to the extent lawful, accrued
interest thereon shall, until paid, bear interest from the Redemption Date at
the rate provided in the Notes.
Section 12.06. Notes Redeemed or Purchased in Part.
Upon surrender to the Paying Agent of a Note which is to be redeemed
in part, the Company shall execute and upon Company Order the Trustee shall
authenticate and deliver to the Holder of such Note, without service charge, a
new Note or Notes, of any authorized denomination as requested by such Holder in
aggregate principal amount equal to, and in exchange for, the unredeemed portion
of the principal amount of the Note so surrendered that is not redeemed.
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to
be duly executed as of the day and year first above written.
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<PAGE>
RHYTHMS NETCONNECTIONS INC., as Issuer
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
STATE STREET BANK AND TRUST COMPANY
OF CALIFORNIA, N.A., as Trustee
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
69
<PAGE>
EXHIBIT A-1
-----------
[FORM OF NOTE]
[FACE OF NOTE]
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT") OR ANY STATE OR OTHER SECURITIES LAWS,
AND, ACCORDINGLY, MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED
WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS
EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, THE
HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS
DEFINED IN RULE 144A UNDER THE SECURITIES ACT) OR (B) IT IS NOT A U.S. PERSON,
IS NOT ACQUIRING THESE SECURITIES FOR THE ACCOUNT OR BENEFIT OF A U.S. PERSON
AND IS ACQUIRING THIS SECURITY IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH
REGULATION S UNDER THE SECURITIES ACT, (2) AGREES THAT IT WILL NOT, WITHIN THE
TIME PERIOD REFERRED TO IN RULE 144(k) TAKING INTO ACCOUNT THE PROVISIONS OF
RULE 144(d), IF APPLICABLE, UNDER THE SECURITIES ACT (THE "RESALE RESTRICTION
TERMINATION DATE") RESELL OR OTHERWISE TRANSFER THIS NOTE EXCEPT (A) TO RHYTHMS
NETCONNECTIONS INC. (THE "COMPANY") OR ANY SUBSIDIARY THEREOF, (B) TO A
QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES
ACT, (C) OUTSIDE THE UNITED STATES IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH
RULE 904 UNDER THE SECURITIES ACT, (D) PURSUANT TO ANOTHER AVAILABLE EXEMPTION
FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OR (E) PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, AND (3) AGREES THAT
IT WILL DELIVER TO EACH PERSON TO WHOM THIS NOTE IS TRANSFERRED A NOTICE
SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND; PROVIDED THAT THE COMPANY AND THE
TRUSTEE SHALL HAVE THE RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER (I)
PURSUANT TO CLAUSE (C) OR (D) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL,
CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM, AND (II) IN
EACH OF THE FOREGOING CASES, TO REQUIRE THAT A CERTIFICATION OF TRANSFER IN THE
FORM APPEARING ON THE OTHER SIDE OF THIS SECURITY IS COMPLETED AND DELIVERED BY
THE TRANSFEROR TO THE TRUSTEE. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF
THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. AS USED HEREIN, THE
TERMS "OFFSHORE TRANSACTION", "UNITED STATES" AND "U.S. PERSON" HAVE THE
MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT.
70
<PAGE>
RHYTHMS NETCONNECTIONS INC.
GLOBAL NOTE
14% SENIOR NOTES DUE 2010, SERIES A
CUSIP No. 762430 AF3 $ 300,000,000
REGISTERED No.
RHYTHMS NETCONNECTIONS INC., a corporation incorporated under the laws
of the State of Delaware (herein called the "Company," which term includes any
successor corporation under the Indenture hereinafter referred to), for value
received, hereby promises to pay to ___________, or registered assigns, the
principal sum of Three Hundred Million Dollars ($300,000,000) on February 15,
2010, at the office or agency of the Company referred to below, and to pay
interest thereon on February 15 and August 15 (each an "Interest Payment Date"),
of each year, commencing on August 15, 2000, accruing from February 23, 2000 or
from the most recent Interest Payment Date to which interest has been paid or
duly provided for, at the rate of 14% per annum, until the principal hereof is
paid or duly provided for. Interest shall be computed on the basis of a 360-day
year of twelve 30-day months.
The interest so payable, and punctually paid or duly provided for, on
any Interest Payment Date will, as provided in the Indenture referred to on the
reverse hereof, be paid to the Person in whose name this Note (or one or more
Predecessor Notes) is registered at the close of business on the February 1 or
August 1 (each a "Regular Record Date"), whether or not a Business Day, as the
case may be, next preceding such Interest Payment Date. Any such interest not
so punctually paid, or duly provided for, and interest on such defaulted
interest at the then applicable interest rate borne by the Notes, to the extent
lawful, shall forthwith cease to be payable to the Holder on such Regular Record
Date, and may be paid to the Person in whose name this Note (or one or more
Predecessor Notes) is registered at the close of business on a Special Record
Date for the payment of such defaulted interest to be fixed by the Trustee,
notice of which shall be given to Holders of Notes not less than 10 days prior
to such Special Record Date, or may be paid at any time in any other lawful
manner not inconsistent with the requirements of any securities exchange or
market on which the Notes may be listed, and upon such notice as may be required
by such exchange or market, all as more fully provided in such Indenture.
Payment of the principal of, premium, if any, and interest on this
Note will be made at the office or agency of the Company maintained for that
purpose in the Borough of Manhattan in The City of New York, State of New York,
or at such other office or agency of the Company as may be maintained for such
purpose, in such coin or currency of the United States of America as at the time
of payment is legal tender for payment of public and private debts; provided,
however, that payment of interest may be made at the option of the Company by
check mailed to the address of the Person entitled thereto as such address shall
appear on the Note Register. However, payment by wire transfer of immediately
available funds to an account within the United States of America will be
required with respect to payments in respect of all Global Notes and to all
other holders which shall have provided written wire instructions to the Company
or Paying Agent by the record date preceding the payment date.
Reference is hereby made to the further provisions of this Note set
forth on the reverse hereof.
Unless the certificate of authentication hereon has been duly executed
by the Trustee referred to on the reverse hereof by manual signature, this Note
shall not be entitled to any benefit under this Indenture, or be valid or
obligatory for any purpose.
71
<PAGE>
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed.
Dated: February 23, 2000 RHYTHMS NETCONNECTIONS INC.
By:
----------------------------------------
Name:
Title:
By:
----------------------------------------
Name:
Title:
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the 14% Senior Notes due 2010, Series A, referred to in
the within-mentioned Indenture.
STATE STREET BANK AND TRUST COMPANY
OF CALIFORNIA, N.A., as Trustee
By:
----------------------------------------
Authorized Signatory
72
<PAGE>
[REVERSE OF NOTE]
1. Indenture. This Note is one of a duly authorized issue of Notes of
the Company designated as its 14% Senior Notes due 2010, Series A (herein called
the "Initial Notes"). The Notes are limited (except as otherwise provided in the
Indenture referred to below) in aggregate principal amount to $300,000,000,
which may be issued under an indenture (herein called the "Indenture") dated as
of February 23, 2000, by and between the Company and State Street Bank and Trust
Company of California, N.A., as trustee (herein called the "Trustee," which term
includes any successor Trustee under the Indenture), to which Indenture and all
indentures supplemental thereto reference is hereby made for a statement of the
respective rights, limitations of rights, duties, obligations and immunities
thereunder of the Company, the Trustee and the Holders of the Notes, and of the
terms upon which the Notes are, and are to be, authenticated and delivered. The
Notes include the Initial Notes and the Unrestricted Notes (including the
Exchange Notes referred to below), issued in exchange for the Initial Notes
pursuant to the Registration Rights Agreement. The Initial Notes and the
Unrestricted Notes, including the Exchange Notes, are treated as a single class
of securities under the Indenture.
All capitalized terms used in this Note which are defined in the
Indenture and not otherwise defined herein shall have the meanings assigned to
them in the Indenture.
The terms of the Notes include those stated in the Indenture and those
made part of the Indenture by reference to the Trust Indenture Act of 1939 (15
U.S.C. (S)(S) 77aaa-77bbbb) (the "TIA"), as in effect on the date of the
Indenture. Notwithstanding anything to the contrary herein, the Notes are
subject to all such terms, and Holders of Notes are referred to the Indenture
and the TIA for a statement of such terms.
No reference herein to the Indenture and no provisions of this Note or
of the Indenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of, premium, if any, and
interest on this Note at the times, place, and rate, and in the coin or
currency, herein prescribed.
2. Registration Rights. The Holder of this Note is entitled to the
benefits of a Registration Rights Agreement, dated February 23, 2000, between
the Company and the Initial Purchasers (as amended from time to time, the
"Registration Rights Agreement"). Pursuant to the Registration Rights Agreement,
the Company is obligated to consummate an exchange offer pursuant to which the
Holders of Initial Notes shall have the right to exchange the Initial Notes for
14% Senior Notes due 2010, Series B, of the Company (herein called the "Exchange
Notes"), which will have been registered under the Securities Act, in like
principal amount and having identical terms as the Initial Notes (other than as
set forth in this paragraph). The Holders of Initial Notes shall be entitled to
receive, as liquidated damages, certain additional interest payments in the
event such exchange offer is not consummated within a specified period and upon
certain other conditions, all pursuant to and in accordance with the terms of
the Registration Rights Agreement and the Indenture.
3. Redemption. The Notes will be redeemable, at the option of the
Company, in whole or in part, on or after February 15, 2005 upon not less than
30 nor more than 60 days' written notice at the redemption prices (expressed as
percentages of principal amount) set forth below, plus accrued and unpaid
interest thereon, if any, to the applicable redemption date, if redeemed during
the twelve-month period beginning on February 15 of each of the years indicated
below:
Year Percentage
---- ----------
2005................................... 107.000%
2006................................... 104.666%
2007................................... 102.333%
2008 and thereafter.................... 100.000%
73
<PAGE>
In addition, at any time on or prior to February 15, 2003, the Company may,
other than in any circumstances resulting in a Change of Control, redeem, at
its option, up to a maximum of 35% of the originally-issued aggregate principal
amount of Notes at a redemption price (determined as of the applicable
redemption date) equal to 114% of the principal amount of the Notes so redeemed
plus accrued and unpaid interest, if any, and liquidated damages, if any, with
the net cash proceeds of (a) one or more Public Equity Offerings and/or (b) the
sale, subsequent to the Issue Date, of Capital Stock (other than Disqualified
Stock) in one or more transactions not constituting a Public Equity Offering to
Strategic Equity Investors, resulting in gross cash proceeds to the Company of
at least $25 million in the aggregate; provided that not less than 65% of the
originally-issued aggregate principal amount of Notes is outstanding immediately
following such redemption. Any such redemption must be effected upon not less
than 30 nor more than 60 days' notice given within 30 days after the
consummation of a Public Equity Offering or sale to one or more Strategic Equity
Investors the net proceeds from which, together with any net proceeds from any
prior Public Equity Offerings or sales to Strategic Equity Investors, are to be
used to effect an optional redemption in accordance with this paragraph.
4. Offers to Purchase. Sections 10.10 and 10.15 of the Indenture provide
that upon the occurrence of a Change of Control and following certain Asset
Sales, and subject to certain conditions and limitations contained therein, the
Company shall make an offer to purchase all or a portion of the Notes at the
purchase prices and in accordance with the procedures set forth in the
Indenture.
5. Defaults and Remedies. If an Event of Default occurs and is
continuing, the Default Amount of all outstanding Notes may be declared due and
payable in the manner and with the effect provided in this Indenture.
6. Defeasance. The Indenture contains provisions (which provisions apply
to this Note) for defeasance at any time of (a) the entire indebtedness of the
Company on this Note and (b) certain restrictive covenants and related Defaults
and Events of Default, in each case upon compliance by the Company with certain
conditions set forth therein.
7. Amendments and Waivers. The Indenture permits, with certain
exceptions as provided therein, the amendment thereof and the modification of
the rights and obligations of the Company and the rights of the Holders under
the Indenture at any time by the Company and the Trustee with the consent of the
Holders of not less than a majority in aggregate principal amount of the Notes
at the time Outstanding. The Indenture also contains provisions permitting the
Holders of specified percentages in aggregate principal amount of the Notes at
the time Outstanding, on behalf of the Holders of all the Notes, to waive
compliance by the Company with certain provisions of the Indenture and certain
past Defaults under the Indenture and this Note and their consequences. Any such
consent or waiver by or on behalf of the Holder of this Note shall be conclusive
and binding upon such Holder and upon all future Holders of this Note and of any
Note issued upon the registration of transfer hereof or in exchange herefor or
in lieu hereof whether or not notation of such consent or waiver is made upon
this Note.
8. Denominations, Transfer and Exchange. The Notes are issuable only in
registered form without coupons in denominations of $1,000 and any integral
multiple thereof. As provided in the Indenture and subject to certain
limitations therein set forth, the Notes are exchangeable for a like aggregate
principal amount of Notes of a different authorized denomination, as requested
by the Holder surrendering the same.
As provided in the Indenture and subject to certain limitations
therein set forth, the transfer of this Note is registrable on the Note
Register, upon surrender of this Note for registration of transfer at the office
or agency of the Company maintained for such purpose in the Borough of Manhattan
in The City of New York, State of New York, or at such other office or agency of
the Company as may be maintained for such purpose, duly endorsed by, or
accompanied by a written instrument of transfer in form satisfactory to the
Company and the Registrar or co-Registrar duly executed by, the Holder hereof or
his attorney duly authorized in writing, and thereupon one or more new Notes,
74
<PAGE>
of authorized denominations and for the same aggregate principal amount, will be
issued to the designated transferee or transferees.
No service charge shall be made for any registration of transfer or
exchange or redemption of Notes, but the Company may require payment of a sum
sufficient to cover any tax or other governmental charge payable in connection
therewith.
9. Persons Deemed Owners. Prior to and at the time of due presentment of
this Note for registration of transfer, the Company, the Trustee and any agent
of the Company or the Trustee may treat the Person in whose name this Note is
registered as the owner hereof for all purposes, whether or not this Note shall
be overdue, and neither the Company, the Trustee nor any agent shall be affected
by notice to the contrary.
10. GOVERNING LAW. THE INDENTURE, THIS NOTE AND EACH SUBSIDIARY GUARANTEE
SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF
NEW YORK WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW.
The Company will furnish to any Holder of a Note upon written request and
without charge a copy of the Indenture and the Registration Rights Agreement
unless the same is publicly available from the Commission. Requests may be made
to: Rhythms NetConnections Inc., 6933 South Revere Parkway, Englewood, Colorado
80112; Attention: Secretary.
ASSIGNMENT FORM
If you the holder want to assign this Note, fill in the form below and have your
signature guaranteed:
I or we assign and transfer this Note to
(Print or type assignee's name and address (including zip code) and social
security or tax ID number)
and irrevocably appoint
agent to transfer this Note on the books of the Company. The agent may
substitute another to act for such agent.
In connection with any transfer of this Note occurring prior to the
date which is the earlier of (i) the date of the declaration by the Commission
of the effectiveness of a registration statement under the Securities Act of
1933, as amended (the "Securities Act"), covering resales of this Note (which
effectiveness shall not have been suspended or terminated at the date of the
transfer) and (ii) the date two years (or such shorter period of time as
permitted by Rule 144 under the Securities Act or any successor provision
thereunder) after the later of the original issuance date appearing on the face
of this Note (or any Predecessor Note) or the last date on which the Company or
any Affiliate of the Company was the owner of this Note (or any Predecessor
Note), the undersigned confirms that it has not utilized any general
solicitation or general advertising in connection with the transfer and that:
75
<PAGE>
[Check One]
---------
[ ] (a) this Note is being transferred in compliance with the
exemption from registration under the Securities Act provided
by Rule 144A thereunder.
or
--
[ ] (b) this Note is being transferred other than in accordance with
(a) above and documents, including (i) a transferee
certificate substantially in the form of Exhibit D to the
Indenture in the case of a transfer to non-QIB Accredited
Investors or (ii) a transferor certificate substantially in
the form of Exhibit E to the Indenture in the case of a
transfer pursuant to Regulation S, are being furnished which
comply with the conditions of transfer set forth in this Note
and the Indenture.
If none of the foregoing boxes is checked and, in the case of (b) above, if the
appropriate document is not attached or otherwise furnished to the Trustee, the
Trustee or Registrar or co-Registrar shall not be obligated to register this
Note in the name of any Person other than the Holder hereof unless and until the
conditions to any such transfer of registration set forth herein and in Sections
3.16 and 3.17 of the Indenture shall have been satisfied.
- --------------------------------------------------------------------------------
Date: Your signature:
- --------------------------------------------------------------------------------
(Sign exactly as your name appears
on the other side of this Note)
- --------------------------------------------------------------------------------
By:
- --------------------------------------------------------------------------------
NOTICE: To be executed by an
executive officer
- --------------------------------------------------------------------------------
Signature Guarantee:
- --------------------------------------------------------------------------------
TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED
The undersigned represents and warrants that it is purchasing this
Note for its own account or an account with respect to which it exercises sole
investment discretion and that it and any such account is a "qualified
institutional buyer" within the meaning of Rule 144A under the Securities Act
and is aware that the sale to it is being made in reliance on Rule 144A and
acknowledges that it has received such information regarding the Company as the
undersigned has requested pursuant to Rule 144A (including the information
specified in Rule 144A(d)(4)) or has determined not to request such information
and that it is aware that the transferor is relying upon the undersigned's
foregoing representations in order to claim the exemption from registration
provided by Rule 144A.
Dated:____________________ Name of
Purchaser:
NOTICE: To be executed by an executive officer
76
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you wish to have this Note purchased by the Company pursuant to
Section 10.10 or 10.15 of the Indenture, check the appropriate box:
Section 10.10 [ ] Section 10.15 [ ]
If you wish to have a portion of this Note purchased by the Company
pursuant to Section 10.10 or 10.15 of the Indenture, state the percentage of
principal amount:
$_________________ or ___%
Date: Your signature:
- --------------------------------------------------------------------------------
(Sign exactly as your name appears on the
other side of this Note)
- --------------------------------------------------------------------------------
By:
- --------------------------------------------------------------------------------
NOTICE: To be executed by an executive
officer
- --------------------------------------------------------------------------------
Signature Guarantee:
- --------------------------------------------------------------------------------
77
<PAGE>
EXHIBIT A-2
-----------
RHYTHMS NETCONNECTIONS INC.
GLOBAL NOTE
14% SENIOR NOTES DUE 2010, SERIES B
CUSIP No. $300,000,000
REGISTERED No.
RHYTHMS NETCONNECTIONS INC., a corporation incorporated under the laws
of the State of Delaware (herein called the "Company," which term includes any
successor corporation under the Indenture hereinafter referred to), for value
received, hereby promises to pay to _______________, or registered assigns, the
principal sum of Three Hundred Million_ ($300,000,000_) on February 15, 2010, at
the office or agency of the Company referred to below, and to pay interest
thereon on February 15 and August 15 (each an "Interest Payment Date"), of each
year, commencing on August 15, 2000, accruing from February 23, 2000 or from the
most recent Interest Payment Date to which interest has been paid or duly
provided for, at the rate of 14% per annum, until the principal hereof is paid
or duly provided for. Interest shall be computed on the basis of a 360-day year
of twelve 30-day months.
The interest so payable, and punctually paid or duly provided for, on
any Interest Payment Date will, as provided in the Indenture referred to on the
reverse hereof, be paid to the Person in whose name this Note (or one or more
Predecessor Notes) is registered at the close of business on the February 1 or
August 1 (each a "Regular Record Date"), whether or not a Business Day, as the
case may be, next preceding such Interest Payment Date. Any such interest not
so punctually paid, or duly provided for, and interest on such defaulted
interest at the then applicable interest rate borne by the Notes, to the extent
lawful, shall forthwith cease to be payable to the Holder on such Regular Record
Date, and may be paid to the Person in whose name this Note (or one or more
Predecessor Notes) is registered at the close of business on a Special Record
Date for the payment of such defaulted interest to be fixed by the Trustee,
notice of which shall be given to Holders of Notes not less than 10 days prior
to such Special Record Date, or may be paid at any time in any other lawful
manner not inconsistent with the requirements of any securities exchange or
market on which the Notes may be listed, and upon such notice as may be required
by such exchange or market, all as more fully provided in such Indenture.
Payment of the principal of, premium, if any, and interest on this
Note will be made at the office or agency of the Company maintained for that
purpose in the Borough of Manhattan in The City of New York, State of New York,
or at such other office or agency of the Company as may be maintained for such
purpose, in such coin or currency of the United States of America as at the time
of payment is legal tender for payment of public and private debts; provided,
however, that payment of interest may be made at the option of the Company by
check mailed to the address of the Person entitled thereto as such address shall
appear on the Note Register. However, payment by wire transfer of immediately
available funds to an account within the United States of America will be
required with respect to payments in respect of all Global Notes and to all
other holders which shall have provided written wire instructions to the Company
or Paying Agent by the record date preceding the payment date.
Reference is hereby made to the further provisions of this Note set
forth on the reverse hereof.
Unless the certificate of authentication hereon has been duly executed
by the Trustee referred to on the reverse hereof by manual signature, this Note
shall not be entitled to any benefit under this Indenture, or be valid or
obligatory for any purpose.
78
<PAGE>
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed.
Dated: RHYTHMS NETCONNECTIONS INC.
By:
----------------------------------------------
Name:
Title:
By:
----------------------------------------------
Name:
Title:
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the 14% Senior Notes due 2010, Series B, referred to in
the within-mentioned Indenture.
STATE STREET BANK AND TRUST COMPANY
OF CALIFORNIA, N.A., as Trustee
By:
----------------------------------------------
Authorized Signatory
79
<PAGE>
[REVERSE OF NOTE]
1. Indenture. This Note is one of a duly authorized issue of Notes of the
Company designated as its 14% Senior Notes due 2010, Series B (herein called the
"Exchange Notes"). The Notes are limited (except as otherwise provided in the
Indenture referred to below) in aggregate principal amount to $300,000,000,
which may be issued under an indenture (herein called the "Indenture") dated as
of February 23, 2000, by and between the Company and State Street Bank and Trust
Company of California, N.A., as trustee (herein called the "Trustee," which term
includes any successor Trustee under the Indenture), to which Indenture and all
indentures supplemental thereto reference is hereby made for a statement of the
respective rights, limitations of rights, duties, obligations and immunities
thereunder of the Company, the Trustee and the Holders of the Notes, and of the
terms upon which the Notes are, and are to be, authenticated and delivered. The
Notes include the Initial Notes and the Unrestricted Notes (including the
Exchange Notes), issued in exchange for the Initial Notes pursuant to the
Registration Rights Agreement. The Initial Notes and the Unrestricted Notes,
including the Exchange Notes, are treated as a single class of securities under
the Indenture.
All capitalized terms used in this Note which are defined in the
Indenture and not otherwise defined herein shall have the meanings assigned to
them in the Indenture.
The terms of the Notes include those stated in the Indenture and those
made part of the Indenture by reference to the Trust Indenture Act of 1939 (15
U.S.C. (S)(S) 77aaa-77bbbb) (the "TIA"), as in effect on the date of the
Indenture. Notwithstanding anything to the contrary herein, the Notes are
subject to all such terms, and Holders of Notes are referred to the Indenture
and the TIA for a statement of such terms.
No reference herein to the Indenture and no provisions of this Note or
of the Indenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of, premium, if any, and
interest on this Note at the times, place, and rate, and in the coin or
currency, herein prescribed.
2. Redemption. The Notes will be redeemable, at the option of the
Company, in whole or in part, on or after February 15, 2005 upon not less than
30 nor more than 60 days' written notice at the redemption prices (expressed as
percentages of principal amount) set forth below, plus accrued and unpaid
interest thereon, if any, to the applicable redemption date, if redeemed during
the twelve-month period beginning on February 15 of each of the years indicated
below:
Year Percentage
---- ----------
2005............................... 107.000%
2006............................... 104.666%
2007............................... 102.333%
2008 and thereafter................ 100.000%
In addition, at any time on or prior to February 15, 2003, the Company may,
other than in any circumstances resulting in a Change of Control, redeem, at its
option, up to a maximum of 35% of the originally-issued aggregate principal
amount of Notes at a redemption price (determined as of the applicable
redemption date) equal to 114% of the principal amount of the Notes so redeemed
plus accrued and unpaid interest, if any, and liquidated damages, if any, with
the net cash proceeds of (a) one or more Public Equity Offerings and/or (b) the
sale, subsequent to the Issue Date, of Capital Stock (other than Disqualified
Stock) in one or more transactions not constituting a Public Equity Offering to
Strategic Equity Investors, resulting in gross cash proceeds to the Company of
at least $25 million in the aggregate;
80
<PAGE>
provided that not less than 65% of the originally-issued aggregate principal
amount of Notes is outstanding immediately following such redemption. Any such
redemption must be effected upon not less than 30 nor more than 60 days' notice
given within 30 days after the consummation of a Public Equity Offering or sale
to one or more Strategic Equity Investors the net proceeds from which, together
with any net proceeds from any prior Public Equity Offerings or sales to
Strategic Equity Investors, are to be used to effect an optional redemption in
accordance with this paragraph.
3. Offers to Purchase. Sections 10.10 and 10.15 of the Indenture provide
that upon the occurrence of a Change of Control and following certain Asset
Sales, and subject to certain conditions and limitations contained therein, the
Company shall make an offer to purchase all or a portion of the Notes at the
purchase prices and in accordance with the procedures set forth in the
Indenture.
4. Defaults and Remedies. If an Event of Default occurs and is
continuing, the Default Amount of all outstanding Notes may be declared due and
payable in the manner and with the effect provided in this Indenture.
5. Defeasance. The Indenture contains provisions (which provisions apply
to this Note) for defeasance at any time of (a) the entire indebtedness of the
Company on this Note and (b) certain restrictive covenants and related Defaults
and Events of Default, in each case upon compliance by the Company with certain
conditions set forth therein.
6. Amendments and Waivers. The Indenture permits, with certain exceptions
as provided therein, the amendment thereof and the modification of the rights
and obligations of the Company and the rights of the Holders under the Indenture
at any time by the Company and the Trustee with the consent of the Holders of
not less than a majority in aggregate principal amount of the Notes at the time
Outstanding. The Indenture also contains provisions permitting the Holders of
specified percentages in aggregate principal amount of the Notes at the time
Outstanding, on behalf of the Holders of all the Notes, to waive compliance by
the Company with certain provisions of the Indenture and certain past Defaults
under the Indenture and this Note and their consequences. Any such consent or
waiver by or on behalf of the Holder of this Note shall be conclusive and
binding upon such Holder and upon all future Holders of this Note and of any
Note issued upon the registration of transfer hereof or in exchange herefor or
in lieu hereof whether or not notation of such consent or waiver is made upon
this Note.
7. Denominations, Transfer and Exchange. The Notes are issuable only in
registered form without coupons in denominations of $1,000 and any integral
multiple thereof. As provided in the Indenture and subject to certain
limitations therein set forth, the Notes are exchangeable for a like aggregate
principal amount of Notes of a different authorized denomination, as requested
by the Holder surrendering the same.
As provided in the Indenture and subject to certain limitations
therein set forth, the transfer of this Note is registrable on the Note
Register, upon surrender of this Note for registration of transfer at the office
or agency of the Company maintained for such purpose in the Borough of Manhattan
in The City of New York, State of New York, or at such other office or agency of
the Company as may be maintained for such purpose, duly endorsed by, or
accompanied by a written instrument of transfer in form satisfactory to the
Company and the Registrar or co-Registrar duly executed by, the Holder hereof or
his attorney duly authorized in writing, and thereupon one or more new Notes, of
authorized denominations and for the same aggregate principal amount, will be
issued to the designated transferee or transferees.
No service charge shall be made for any registration of transfer or
exchange or redemption of Notes, but the Company may require payment of a sum
sufficient to cover any tax or other governmental charge payable in connection
therewith.
8. Persons Deemed Owners. Prior to and at the time of due presentment of
this Note for registration of transfer, the Company, the Trustee and any agent
of the Company or the Trustee may treat the Person in whose name
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this Note is registered as the owner hereof for all purposes, whether or not
this Note shall be overdue, and neither the Company, the Trustee nor any agent
shall be affected by notice to the contrary.
9. GOVERNING LAW. THE INDENTURE, THIS NOTE AND EACH SUBSIDIARY
GUARANTEE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF
THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW.
The Company will furnish to any Holder of a Note upon written request and
without charge a copy of the Indenture unless the same is publicly available
from the Commission. Requests may be made to: Rhythms NetConnections Inc., 6933
South Revere Parkway, Englewood, Colorado 80112; Attention: Secretary.
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ASSIGNMENT FORM
If you the holder want to assign this Note, fill in the form below and have your
signature guaranteed:
I or we assign and transfer this Note to
(Print or type assignee's name and address (including zip code) and social
security or tax ID number)
and irrevocably appoint
agent to transfer this Note on the books of the Company. The agent may
substitute another to act for such agent.
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OPTION OF HOLDER TO ELECT PURCHASE
If you wish to have this Note purchased by the Company pursuant to
Section 10.10 or 10.15 of the Indenture, check the appropriate box:
Section 10.10 [ ] Section 10.15 [ ]
If you wish to have a portion of this Note purchased by the Company
pursuant to Section 10.10 or 10.15 of the Indenture, state the percentage of
principal amount:
$_________________ or ___%
- --------------------------------------------------------------------------------
Date: Your signature:
- --------------------------------------------------------------------------------
(Sign exactly as your name appears on the
other side of this Note)
- --------------------------------------------------------------------------------
By:
- --------------------------------------------------------------------------------
NOTICE: To be executed by an executive
officer
- --------------------------------------------------------------------------------
Signature Guarantee:
- --------------------------------------------------------------------------------
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EXHIBIT B
---------
FORM OF SUPPLEMENTAL INDENTURE TO BE DELIVERED
BY SUBSIDIARY GUARANTORS
SUPPLEMENTAL INDENTURE (this "Supplemental Indenture") dated as of _____
between __________ (the "Subsidiary Guarantor"), a subsidiary of Rhythms
NetConnections Inc. (or its successor), a company incorporated under the laws of
the State of Delaware (the "Company"), and State Street Bank and Trust Company
of California, N.A.,as trustee under the indenture referred to below (the
"Trustee").
W I T N E S S E T H
WHEREAS, the Company has heretofore executed and delivered to the Trustee
an indenture (the "Indenture"), dated as of February 23, 2000, providing for the
issuance of an aggregate principal amount of $300,000,000 of 14% Senior Notes
due 2010 (the "Notes");
WHEREAS, Section 10.22 of the Indenture provides that, under certain
circumstances, the Company is required to cause the Subsidiary Guarantor to
execute and deliver to the Trustee a Subsidiary Guarantee on the terms and
conditions set forth herein; and
WHEREAS, pursuant to Section 9.01 of the Indenture, the Trustee is
authorized to execute and deliver this Supplemental Indenture;
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt of which is hereby acknowledged, the
Subsidiary Guarantor and the Trustee mutually covenant and agree for the equal
and ratable benefit of the Holders of the Notes as follows:
1. Capitalized Terms. Capitalized terms used herein without definition
shall have the meanings assigned to them in the Indenture.
2. Indenture Provision Pursuant to Which Guarantee Is Given. This
Supplemental Indenture is being executed and delivered pursuant to Section 10.22
of the Indenture.
3. Agreements to Guarantee. The Subsidiary Guarantor hereby agrees as
follows:
(a) The Subsidiary Guarantor, jointly and severally with all other
Subsidiary Guarantors, if any, unconditionally guarantees to each Holder of a
Note authenticated and delivered by the Trustee and to the Trustee and its
successors and assigns, regardless of the validity and enforceability of the
Indenture, the Notes and the obligations of the Company under the Indenture and
the Notes, that:
(i) the principal of, premium, if any, on and interest on the Notes
shall be promptly paid in full when due, whether at maturity, by
acceleration, redemption or otherwise, and interest on the overdue
principal of, premium, if any, and interest on the Notes, to the extent
lawful, and all other obligations of the Company to the Holders or the
Trustee thereunder shall be promptly paid in full, all in accordance with
the terms thereof; and
(ii) in case of any extension of time for payment or renewal of any
Notes or any of such other obligations, that the same shall be promptly
paid in full when due in accordance with the terms of the extension or
renewal, whether at stated maturity, by acceleration or otherwise.
(b) Notwithstanding the foregoing, in the event that this Subsidiary
Guarantee would constitute or result in a violation of any applicable fraudulent
conveyance or similar law of any relevant jurisdiction, the liability of the
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Subsidiary Guarantor under this Supplemental Indenture and its Subsidiary
Guarantee shall be limited to such amount as will not, after giving effect
thereto, and to all other liabilities of the Subsidiary Guarantor, result in
such amount constituting a fraudulent transfer or conveyance.
4. Execution and Delivery of Subsidiary Guarantees.
(a) To evidence its Subsidiary Guarantee set forth in this Supplemental
Indenture, the Subsidiary Guarantor hereby agrees that a notation of such
Subsidiary Guarantee substantially in the form of Annex A hereto shall be
endorsed by an officer of such Subsidiary Guarantor on each Note authenticated
and delivered by the Trustee after the date hereof.
(b) Notwithstanding the foregoing, the Subsidiary Guarantor hereby agrees
that its Subsidiary Guarantee set forth herein shall remain in full force and
effect notwithstanding any failure to endorse on each Note a notation of such
Subsidiary Guarantee.
(c) If an officer whose signature is on this Supplemental Indenture or on
the Subsidiary Guarantee no longer holds that office at the time the Trustee
authenticates the Note on which a Subsidiary Guarantee is endorsed, the
Subsidiary Guarantee shall be valid nevertheless.
(d) The delivery of the Note by the Trustee, after the authentication
thereof under the Indenture, shall constitute due delivery of the Subsidiary
Guarantee set forth in this Supplemental Indenture on behalf of the Subsidiary
Guarantor.
(e) The Subsidiary Guarantor hereby agrees that its obligations hereof
shall be unconditional, regardless of the validity, regularity or enforceability
of the Notes or the Indenture, the absence of any action to enforce the same,
any waiver or consent by any Holder of the Notes with respect to any provisions
hereof or thereof, the recovery of any judgment against the Company, any action
to enforce the same or any other circumstance which might otherwise constitute a
legal or equitable discharge or defense of a guarantor.
(f) The Subsidiary Guarantor hereby waives diligence, presentment, demand
of payment, filing of claims with a court in the event of insolvency or
bankruptcy of the Company, any right to require a proceeding first against the
Company, protest, notice and all demands whatsoever and covenants that its
Subsidiary Guarantee made pursuant to this Supplemental Indenture will not be
discharged except by complete performance of the obligations contained in the
Notes and the Indenture or pursuant to Section 5(b) of this Supplemental
Indenture.
(g) If the Trustee or any Holder has instituted any proceeding to enforce
any right or remedy under this Supplemental Indenture and such proceeding has
been discontinued or abandoned for any reason, or has been determined adversely
to the Trustee or to such Holder, then, and in every such case, subject to any
determination in such proceeding, the Subsidiary Guarantor, the Trustee and the
Holders shall be restored severally and respectively to their former positions
hereof and thereafter all rights and remedies of the Subsidiary Guarantor, the
Trustee and the Holders shall continue as though no such proceeding had been
instituted.
(h) The Subsidiary Guarantor hereby waives and will not in any manner
whatsoever claim or take the benefit or advantage of, any rights of
reimbursement, indemnity or subrogation or any other rights against the Company
or any other Subsidiary Guarantor as a result of any payment by such Subsidiary
Guarantor under its Subsidiary Guarantee. The Subsidiary Guarantor further
agrees that, as between the Subsidiary Guarantors, on the one hand, and the
Holders and the Trustee, on the other hand:
(i) the maturity of the obligations guaranteed hereby may be
accelerated as provided in Article Five of the Indenture for the purposes
of the Subsidiary Guarantee made pursuant to this Supplemental Indenture,
notwithstanding any stay, injunction or other prohibition preventing such
acceleration in respect of the obligations guaranteed hereby; and
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(ii) in the event of any declaration of acceleration of such
obligations as provided in Article Five of the Indenture, such obligations
(whether or not due and payable) shall forthwith become due and payable by
the Subsidiary Guarantor for the purpose of the Subsidiary Guarantee made
pursuant to this Supplemental Indenture.
(i) The Subsidiary Guarantor shall have the right to seek contribution
from any other non-paying Subsidiary Guarantor, if any, so long as the exercise
of such right does not impair the rights of the Holders under the Subsidiary
Guarantee made pursuant to this Supplemental Indenture.
(j) The Subsidiary Guarantor covenants (to the extent that it may lawfully
do so) that it will not at any time insist upon, or plead, or in any manner
whatsoever claim or take the benefit or advantage of, any stay, extension or
usury law wherever enacted, now or at any time hereafter in force, which may
affect the covenants or the performance of the Indenture or this Subsidiary
Guarantee; and the Subsidiary Guarantor (to the extent that it may lawfully do
so) hereby expressly waives all benefit or advantage of any such law, and
covenants that it will not hinder, delay or impede the execution of any power
herein granted to the Trustee, but will suffer and permit the execution of every
such power as though no such law had been enacted.
5. Subsidiary Guarantor May Consolidate, Etc. on Certain Terms.
(a) Except as set forth in Articles Eight and Ten of the Indenture, nothing
contained in the Indenture, this Supplemental Indenture or in the Notes shall
prevent any consolidation or merger of the Subsidiary Guarantor with or into the
Company or any other Subsidiary Guarantor or shall prevent any transfer, sale or
conveyance of the property of the Subsidiary Guarantor as an entirety or
substantially as an entirety, to the Company or any other Subsidiary Guarantor.
(b) Except as set forth in Articles Eight and Ten of the Indenture, upon
the sale, exchange or transfer, to any Person not an Affiliate of the Company,
of all of the Capital Stock of the Subsidiary Guarantor held by the Company and
its Subsidiaries, or of all or substantially all of the assets of the Subsidiary
Guarantor, whether by way of merger, consolidation or otherwise, which sale,
exchange or transfer is made in compliance with all applicable provisions of the
Indenture, then such Subsidiary Guarantor (in the event of a sale, exchange or
transfer of all the Capital Stock of such Subsidiary Guarantor) or the
corporation acquiring the property (in the event of a sale, exchange or transfer
of all or substantially all of the assets of such Subsidiary Guarantor) will be
released and relieved of any obligation under its Subsidiary Guarantee; provided
that the Net Cash Proceeds of such sale, exchange or transfer are applied in
accordance with Section 10.15 of the Indenture. Except with respect to
transactions set forth in the preceding sentence, the Company and the Subsidiary
Guarantor covenant and agree that upon any such merger, consolidation or sale,
the performance of all covenants and conditions of this Supplemental Indenture
to be performed by such Subsidiary Guarantor shall be expressly assumed by
supplemental indenture satisfactory in form to the Trustee, by the corporation
formed by such consolidation, or into which the Subsidiary Guarantor shall have
merged, or by the corporation which shall have acquired such property. Upon
receipt of an Officers' Certificate of the Company or the Subsidiary Guarantor,
as the case may be, to the effect that the Company or such Subsidiary Guarantor
has complied with the first sentence of this Section 5(b), the Trustee shall
execute any documents reasonably requested by the Company or the Subsidiary
Guarantor, at the cost of the Company or such Subsidiary Guarantor, as the case
may be, in order to evidence the release of such Subsidiary Guarantor from its
obligations under its Guarantee endorsed on the Notes and under the Indenture
and this Supplemental Indenture.
6. Releases upon Release of Guarantee of Guaranteed Indebtedness.
Concurrently with the release or discharge of all of the Subsidiary Guarantor's
Guarantees of the payment of Indebtedness of the Company (other than a release
or discharge by or as a result of payment under such Guarantee of Indebtedness),
the Subsidiary Guarantor shall be automatically and unconditionally released and
relieved of its obligations under this Supplemental Indenture and its Subsidiary
Guarantee made pursuant to Section 4 of this Supplemental Indenture. Upon
delivery by the Company to the Trustee of an Officer's Certificate to the effect
that such release or discharge has occurred, the Trustee shall execute any
documents reasonably required in order to evidence the release of the Subsidiary
Guarantor
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from its obligations under this Supplemental Indenture and its Subsidiary
Guarantee made pursuant hereto; provided such documents shall not affect or
impair the rights of the Trustee and Paying Agent under Section 6.07 of the
Indenture.
7. Releases upon Designation as an Unrestricted Subsidiary. Upon the
Designation of the Subsidiary Guarantor as an Unrestricted Subsidiary in
compliance with Section 10.20 of the Indenture, the Subsidiary Guarantor shall
be automatically and unconditionally released and relieved of its obligations
under this Supplemental Indenture and its Subsidiary Guarantee made pursuant to
Section 4 of this Supplemental Indenture. Upon delivery by the Company to the
Trustee of an Officer's Certificate to the effect that such Designation has
occurred in compliance with Section 10.20 of the Indenture, the Trustee shall
execute any documents reasonably required in order to evidence the release of
the Subsidiary Guarantor from its obligations under this Supplemental Indenture
and its Subsidiary Guarantee made pursuant hereto; provided such documents shall
not affect or impair the rights of the Trustee and Paying Agent under Section
6.07 of the Indenture.
8. NEW YORK LAW TO GOVERN. THIS SUPPLEMENTAL INDENTURE SHALL BE GOVERNED
BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT
GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW.
9. Counterparts. The parties may sign any number of copies of this
Supplemental Indenture. Each signed copy shall be an original, but all of them
together represent the same agreement.
10. Effect of Headings. The Section headings herein are for convenience
only and shall not effect the construction hereof.
11. Ranking. [Ranking terms to be provided as required by Section 10.22
of the Indenture.]
[Signatures on following page]
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IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture
to be duly executed and attested, all as of the date first above written.
Dated: __________ __, ____ [Subsidiary Guarantor]
By: ___________________________
Name:
Title:
Dated: ___________ __, ____ State Street Bank and Trust Company of
California, N.A., as Trustee
By: ___________________________
Name:
Title:
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ANNEX A TO SUPPLEMENTAL INDENTURE
FORM OF NOTATION OF SUBSIDIARY GUARANTEE ON NOTE
Each Subsidiary Guarantor (as defined in the Indenture) has jointly and
severally unconditionally guaranteed (a) the due and punctual payment of the
principal of, premium, if any, and interest on the Notes, whether at stated
maturity or an Interest Payment Date, by acceleration, call for redemption or
otherwise, (b) the due and punctual payment of interest on the overdue principal
and premium of, if any, and interest, to the extent lawful, on the Notes and (c)
that in case of any extension of time of payment or renewal of any Notes or any
of such other obligations, the same will be promptly paid in full when due in
accordance with the terms of the extension of renewal, whether at Stated
Maturity, by acceleration or otherwise. Notwithstanding the foregoing, in the
event that the Subsidiary Guarantee would constitute or result in a violation of
any applicable fraudulent conveyance or similar law of any relevant
jurisdiction, the liability of the Subsidiary Guarantor under its Subsidiary
Guarantee shall be limited to such amount as will not, after giving effect
thereto, and to all other liabilities of the Subsidiary Guarantor, result in
such amount constituting a fraudulent transfer or conveyance. The Subsidiary
Guarantee shall not be valid or obligatory for any purpose until the certificate
of authentication on the Note upon which the Subsidiary Guarantee is noted shall
have been executed by the Trustee under the Indenture by the manual or facsimile
signature of one of its authorized officers. [Ranking terms to be provided as
required by Section 10.22 of the Indenture.]
Dated: __________ __, ____ [Subsidiary Guarantor]
By: ___________________________
Name:
Title:
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EXHIBIT C
---------
FORM OF LEGEND FOR BOOK-ENTRY SECURITIES
Any Global Note authenticated and delivered hereunder shall bear a
legend (which would be in addition to any other legends required in the case of
a Restricted Note) in substantially the following form:
THIS NOTE IS A GLOBAL NOTE WITHIN THE MEANING OF THE INDENTURE
HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITORY OR A
NOMINEE OF A DEPOSITORY OR A SUCCESSOR DEPOSITORY. THIS NOTE IS NOT
EXCHANGEABLE FOR SECURITIES REGISTERED IN THE NAME OF A PERSON OTHER THAN
THE DEPOSITORY OR ITS NOMINEE EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED
IN THE INDENTURE, AND NO TRANSFER OF THIS NOTE (OTHER THAN A TRANSFER OF
THIS NOTE AS A WHOLE BY THE DEPOSITORY TO A NOMINEE OF THE DEPOSITORY OR BY
A NOMINEE OF THE DEPOSITORY TO THE DEPOSITORY OR ANOTHER NOMINEE OF THE
DEPOSITORY) MAY BE REGISTERED EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED
IN THE INDENTURE.
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE
OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE
COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT,
AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN
SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND
ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED
BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE
HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS
THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
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EXHIBIT D
---------
Form of Certificate To Be
Delivered in Connection with
Transfers to Institutional (non-QIB) Accredited Investors
__________, ____
State Street Bank and Trust Company
of California, N.A.
633 West 5th Street, 12th Floor
Los Angeles, California 90071
Attention: Corporate Trust Department
Re: Rhythms NetConnections Inc.(the "Company")
Indenture (the "Indenture") relating to
14% Senior Notes due 2010
-------------------------
Ladies and Gentlemen:
In connection with our proposed purchase of 14% Senior Notes due 2010
(the "Notes") of the Company we confirm that:
1. We have received such information as we deem necessary in order to
make our investment decision.
2. We understand that any subsequent transfer of the Notes is subject
to certain restrictions and conditions set forth in the Indenture and the
undersigned agrees to be bound by, and not to resell, pledge or otherwise
transfer the Notes except in compliance with, such restrictions and
conditions and the Securities Act of 1933, as amended (the "Securities
Act").
3. We understand that the offer and sale of the Notes have not been
registered under the Securities Act, and that the Notes may not be offered
or sold within the United States or to, or for the account or benefit of,
U.S. persons except as permitted in the following sentence. We agree, on
our own behalf and on behalf of any accounts for which we are acting as
hereinafter stated, that if we should sell any Notes, we will do so only
(A) to the Company, (B) inside the United States in accordance with Rule
144A under the Securities Act to a "qualified institutional buyer" (as
defined therein), (C) inside the United States to an institutional
"accredited investor" (as defined below) that, prior to such transfer,
furnishes (or has furnished on its behalf by a U.S. broker-dealer) to the
Trustee a signed letter substantially in the form hereof, (D) outside the
United States in accordance with Regulation S under the Securities Act, (E)
pursuant to the exemption from registration provided by Rule 144 under the
Securities Act (if available), or (F) pursuant to an effective registration
statement under the Securities Act, and we further agree to provide to any
person purchasing Notes from us a notice advising such purchaser that
resales of the Notes are restricted as stated herein.
4. We understand that, on any proposed resale of Notes, we will be
required to furnish to the Trustee and the Company such certification,
legal opinion and other information as the Trustee and the
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Company may reasonably require to confirm that the proposed sale complies
with the foregoing restrictions. We further understand that the Notes
purchased by us will bear a legend to the foregoing effect.
5. We are an institutional "accredited investor" (as defined in Rule
501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act) and
have such knowledge and experience in financial and business matters as to
be capable of evaluating the merits and risks of our investment in the
Notes, and we and any accounts for which we are acting are each able to
bear the economic risk of our or their investment, as the case may be.
6. We are acquiring the Notes purchased by us for our account or for
one or more accounts (each of which is an institutional "accredited
investor") as to each of which we exercise sole investment discretion.
You and the Company and your and their respective counsel are entitled
to rely upon this letter and are irrevocably authorized to produce this letter
or a copy hereof to any interested party in any administrative or legal
proceeding or official inquiry with respect to the matters covered hereby.
Very truly yours,
[Name of Proposed Transferee]
By: ______________________________
[Authorized Signature]
Signature Guarantee: _____________________
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EXHIBIT E
---------
Form of Certificate To Be Delivered
in Connection with Transfers
Pursuant to Regulation S
------------------------
___________________________, _____
State Street Bank and Trust Company
of California, N.A.
633 West 5th Street, 12th Floor
Los Angeles, California 90071
Attention: Corporate Trust Department
Re: Rhythms NetConnections Inc. (the "Company")
14% Senior Notes due 2010
Ladies and Gentlemen:
In connection with our proposed sale of 14% Senior Notes due 2010 (the
"Notes") of the Company, we confirm that such sale has been effected pursuant to
and in accordance with Regulation S under the U.S. Securities Act of 1933, as
amended (the "Securities Act"), and, accordingly, we represent that:
(1) the offer of the Notes was not made to a person in the United
States;
(2) either (a) at the time the buy offer was originated, the
transferee was outside the United States or we and any person acting on our
behalf reasonably believed that the transferee was outside the United
States, or (b) the transaction was executed in, on or through the
facilities of a designated off-shore securities market and neither we nor
any person acting on our behalf knows that the transaction has been pre-
arranged with a buyer in the United States;
(3) no directed selling efforts have been made in the United States in
contravention of the requirements of Rule 903(a) or Rule 904(a) of
Regulation S, as applicable;
(4) the transaction is not part of a plan or scheme to evade the
registration requirements of the Securities Act;
(5) we have advised the transferee of the transfer restrictions
applicable to the Notes;
(6) if the circumstances set forth in Rule 904(b) under the Securities
Act are applicable, we have complied with the additional conditions
therein, including (if applicable) sending a confirmation or other notice
stating that the Notes may be offered and sold during the distribution
compliance period specified in Rule 903(b)(3), as applicable, in accordance
with the provisions of Regulation S; pursuant to registration of the
Securities under the Securities Act; or pursuant to an available exemption
from the registration requirements under the Securities Act;
(7) if the sale is made during a distribution compliance period and
the provisions of Rule 903(b)(3) are applicable thereto, we confirm that
such sale has been made in accordance with such provisions; and
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(8) if the provisions of Rule 144 under the Securities Act are
applicable, we have complied with the terms and conditions thereof.
You and the Company and your and their respective counsel are entitled
to rely upon this letter and are irrevocably authorized to produce this letter
or a copy hereof to any interested party in any administrative or legal
proceedings or official inquiry with respect to the matters covered hereby.
Terms used in this certificate have the meanings set forth in Regulation S.
Very truly yours,
[Name of Transferor]
By:
-----------------------------------------
Authorized Signature
Signature Guarantee: ____________________
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SCHEDULE A
INDEBTEDNESS OF THE COMPANY OR RESTRICTED SUBSIDIARIES
THAT IS OUTSTANDING OR COMMITTED BUT UNDRAWN
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EXHIBIT 4.19
NOTES REGISTRATION RIGHTS AGREEMENT
Dated as of February 23, 2000
among
Rhythms NetConnections, Inc.,
Issuer
and
Merrill Lynch & Co.,
Merrill Lynch, Pierce, Fenner & Smith
Incorporated, and
Salomon Smith Barney Inc.
Chase Securities Inc.
Credit Suisse First Boston,
Initial Purchasers
<PAGE>
TABLE OF CONTENTS
Page
1. Definitions...................................................... 1
1933 Act......................................................... 1
1934 Act......................................................... 1
Depositary....................................................... 1
Exchange Notes................................................... 1
Exchange Offer................................................... 1
Exchange Offer Registration...................................... 1
Exchange Offer Registration Statement............................ 2
Holders.......................................................... 2
Indenture........................................................ 2
Initial Purchasers............................................... 2
Majority Holders................................................. 2
Original Issue Date.............................................. 2
Person........................................................... 2
Prospectus....................................................... 2
Purchase Agreement............................................... 2
Registration Expenses............................................ 2
Registration Statement........................................... 3
SEC.............................................................. 3
Shelf Registration............................................... 3
Shelf Registration Statement..................................... 3
Transfer Restricted Notes........................................ 3
Trustee.......................................................... 3
2. Registration Under the 1933 Act.................................. 4
(a) Exchange Offer Registration................................ 4
(b) Shelf Registration........................................ 5
(c) Expenses.................................................. 7
(d) Effective Registration Statement.......................... 7
(e) Accrual and Payment of Additional Interest................ 8
(f) Specific Enforcement...................................... 8
3. Registration Procedures.......................................... 9
4. Underwritten Registrations....................................... 15
5. Indemnification and Contribution................................. 16
6. Miscellaneous.................................................... 18
(a) Rule 144 and Rule 144A..................................... 18
(b) No Inconsistent Agreements................................ 19
(c) Amendments and Waivers.................................... 19
(d) Notices................................................... 19
(e) Successors and Assigns.................................... 20
(f) Third Party Beneficiary................................... 20
(g) Counterparts.............................................. 20
(h) Headings.................................................. 20
(i) Governing Law............................................. 20
(j) Severability.............................................. 20
<PAGE>
NOTES REGISTRATION RIGHTS AGREEMENT
THIS NOTES REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and
entered into as of February 23, 2000, by and among RHYTHMS NETCONNECTIONS, INC.,
a Delaware corporation (the "Company"), and MERRILL LYNCH & CO., MERRILL LYNCH,
PIERCE, FENNER & SMITH INCORPORATED ("Merrill Lynch"), SALOMON SMITH BARNEY
INC., CHASE SECURITIES INC. and CREDIT SUISSE FIRST BOSTON (collectively the
"Initial Purchasers").
This Agreement is made pursuant to the Purchase Agreement dated
February 16, 2000 among the Company and the Initial Purchasers (the "Purchase
Agreement"), with respect to the issue and sale by the Company and the purchase
by the Initial Purchasers of the respective quantity of the Company's 14% Senior
Notes due 2010 (the "Notes"). In order to induce the Initial Purchasers to
enter into the Purchase Agreement, the Company has agreed to provide to the
Initial Purchasers and to other holders of Notes the registration rights set
forth in this Agreement. The execution and delivery of this Agreement is a
condition to the closing under the Purchase Agreement.
In consideration of the foregoing, the parties hereto agree as
follows:
1. Definitions.
As used in this Agreement, the following capitalized defined terms shall
have the following meanings:
"1933 Act" shall mean the Securities Act of 1933, as amended from time to
time, and the rules and regulations of the SEC promulgated thereunder.
"1934 Act" shall mean the Securities Exchange Act of 1934, as amended from
time to time, and the rules and regulations of the SEC promulgated thereunder.
"Depositary" shall mean The Depository Trust Company, or any other
depositary appointed by the Company; provided, however, that any such depositary
must have an address in the Borough of Manhattan, in the City of New York.
"Exchange Notes" shall mean 14% Senior Notes due 2010, Series B of the
Company, issued under the Indenture containing terms identical to the respective
Notes (except that (i) interest on the Exchange Notes shall accrue from the last
date on which interest was paid on the Notes, (ii) the transfer restrictions
thereon shall be eliminated and (iii) certain provisions relating to payment of
additional interest shall be eliminated) to be offered to Holders of Notes in
exchange for Notes pursuant to the Exchange Offer.
"Exchange Offer" shall mean the exchange offer by the Company of Exchange
Notes for Transfer Restricted Notes pursuant to Section 2(a) hereof.
"Exchange Offer Registration" shall mean a registration under the 1933 Act
effected pursuant to Section 2(a) hereof.
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"Exchange Offer Registration Statement" shall mean an exchange offer
registration statement on Form S-4 (or, if applicable, on another appropriate
form), and all amendments and supplements to such registration statement, in
each case including the Prospectus contained therein, all exhibits thereto and
all material incorporated by reference therein.
"Holders" shall mean the Initial Purchasers, for so long as they own any
Transfer Restricted Notes, and each of their respective successors, assigns and
direct and indirect transferees who become registered owners of Transfer
Restricted Notes under the Indenture.
"Indenture" shall mean the Indenture relating to the Notes dated as of
February 23, 2000, between the Company and State Street Bank and Trust Company
of California, N.A., as trustee (the "Trustee"), and as the same may be amended
from time to time in accordance with the terms thereof.
"Initial Purchasers" shall have the meaning set forth in the preamble of
this Agreement.
"Majority Holders" shall mean the Holders of a majority of the aggregate
principal amount of Transfer Restricted Notes outstanding; provided that
whenever the consent or approval of Holders of a specified percentage of
Transfer Restricted Notes is required hereunder, Transfer Restricted Notes held
by the Company or any of its affiliates (as such term is defined in Rule 405
under the 1933 Act) shall be disregarded in determining whether such consent or
approval was given by the Holders of such required percentage or amount.
"Original Issue Date" shall mean the date of original issuance of the
Notes.
"Person" shall mean an individual, partnership, limited liability company,
corporation, trust or unincorporated organization, or a government or agency or
political subdivision thereof.
"Prospectus" shall mean the prospectus included in a Registration
Statement, including any preliminary prospectus, and any such prospectus as
amended or supplemented by any prospectus supplement, including a prospectus
supplement with respect to the terms of the offering of any portion of the
Transfer Restricted Notes covered by a Shelf Registration Statement, and by all
other amendments and supplements to a prospectus, including post-effective
amendments, and in each case including all material incorporated by reference
therein.
"Purchase Agreement" shall have the meaning set forth in the preamble of
this Agreement.
"Registration Expenses" shall mean any and all expenses incident to
performance of or compliance by the Company with this Agreement, including
without limitation: (i) all SEC, stock exchange or National Association of
Securities Dealers, Inc. ("NASD") registration and filing fees, (ii) all fees
and expenses incurred in connection with compliance with state or other
securities or blue sky laws and compliance with the rules of the NASD (including
reasonable fees and disbursements of United States and local counsel for any
underwriters and Holders in connection with state or other securities or blue
sky qualification of any of the Exchange Notes or Transfer Restricted Notes),
(iii) all expenses of any Persons in preparing, printing and distributing any
Registration Statement, any Prospectus, any amendments or supplements thereto,
any underwriting agreements, securities sales agreements, certificates
representing the
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Exchange Notes and other documents relating to the performance of and compliance
with this Agreement, (iv) all rating agency fees, (v) all fees and disbursements
relating to the qualification of the Indenture under applicable securities laws,
(vi) the reasonable fees and disbursements of counsel for the Company and of the
independent public accountants of the Company, including the expenses of any
special audits or "cold comfort" letters required by or incident to such
performance and compliance, (vii) the fees and expenses of a "qualified
independent underwriter" as defined by Conduct Rule 2720 of the NASD, if
required by the NASD rules, in connection with the offering of the Transfer
Restricted Notes, and (viii) the reasonable fees and expenses of the Trustee,
including its counsel, and any escrow agent or custodian. Notwithstanding the
foregoing, "Registration Expenses" shall exclude, and the Holders of the
Transfer Restricted Notes being registered shall pay, any amounts required by
Section 2(c) to be paid by the Holders.
"Registration Statement" shall mean any registration statement of the
Company which covers any of the Exchange Notes or Transfer Restricted Notes
pursuant to the provisions of this Agreement, and all amendments and supplements
to any such Registration Statement, including post-effective amendments, in each
case including the Prospectus contained therein, all exhibits thereto and all
material incorporated by reference therein.
"SEC" shall mean the Securities and Exchange Commission.
"Shelf Registration" shall mean a registration effected pursuant to Section
2(b) hereof.
"Shelf Registration Statement" shall mean a "shelf" registration statement
of the Company pursuant to the provisions of Section 2(b) of this Agreement
which covers all of the Transfer Restricted Notes on an appropriate form under
Rule 415 under the 1933 Act, or any similar rule that may be adopted by the SEC,
and all amendments and supplements to such registration statement, including
post-effective amendments, in each case including the Prospectus contained
therein, all exhibits thereto and all material incorporated by reference
therein.
"Transfer Restricted Notes" shall mean the Notes; provided, however, that
any Note shall cease to be a Transfer Restricted Note when (i) such Note has
been exchanged by a person other than a broker-dealer for an Exchange Note in
the Exchange Offer, (ii) following the exchange by a broker-dealer in the
Exchange Offer of a Note for an Exchange Note, such Exchange Note is sold to a
purchaser who receives from such broker-dealer on or prior to the date of such
sale a copy of the prospectus contained in the Exchange Offer Registration
Statement, (iii) such Note has been effectively registered under the 1933 Act
and disposed of in accordance with the Shelf Registration Statement, (iv) such
Note is distributed to the public pursuant to Rule 144(k) under the 1933 Act (or
any similar provision then in force, but not Rule 144A under the 1933 Act), (v)
such Note shall have been otherwise transferred by the Holder thereof and a new
Note not bearing a legend restricting further transfer shall have been delivered
by the Company and subsequent disposition of such Note shall not require
registration or qualification under the 1933 Act or any similar state law then
in force or (vi) such Note ceases to be outstanding.
"Trustee" shall mean the Trustee under the Indenture.
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2. Registration Under the 1933 Act.
(a) Exchange Offer Registration. To the extent not prohibited by any
applicable law or applicable interpretation of the staff of the SEC, the Company
shall (A) cause to be filed an Exchange Offer Registration Statement with the
SEC within 90 days after the Original Issue Date covering the offer by the
Company to the Holders of Exchange Notes for all of their Transfer Restricted
Notes, (B) use its best efforts to cause such Exchange Offer Registration
Statement to be declared effective under the 1933 Act as promptly as possible
but in any event within 150 days after the Original Issue Date and (C) use its
best efforts to consummate the Exchange Offer within 30 days after the date on
which such Exchange Offer Registration Statement is declared effective under the
1933 Act. Upon the effectiveness of the Exchange Offer Registration Statement,
the Company shall promptly commence the Exchange Offer, it being the objective
of such Exchange Offer to enable each Holder (other than Participating Broker-
Dealers (as defined in Section 3(f))) eligible and electing to exchange Transfer
Restricted Notes for Exchange Notes (assuming that such Holder is not an
affiliate of the Company within the meaning of Rule 405 under the 1933 Act,
acquires the Exchange Notes in the ordinary course of such Holder's business and
has no arrangements or understandings with any person to participate in the
Exchange Offer for the purpose of distributing the Exchange Notes) to trade such
Exchange Notes from and after their receipt without any limitations or
restrictions under the 1933 Act and without material restrictions under the
securities laws of a substantial proportion of the several states of the United
States.
In connection with the Exchange Offer, the Company shall:
(i) mail to each Holder a copy of the Prospectus forming part of
the Exchange Offer Registration Statement, together with an appropriate
letter of transmittal and related documents;
(ii) keep the Exchange Offer open for not less than 20 business
days after the date notice thereof is mailed to the Holders (or longer if
required by applicable law);
(iii) use the services of the Depositary for the Exchange Offer with
respect to Notes evidenced by global certificates;
(iv) permit Holders to withdraw tendered Transfer Restricted Notes
at any time prior to the close of business, New York City time, on the last
business day on which the Exchange Offer shall remain open, by sending to
the institution specified in the notice, a telegram, telex, facsimile
transmission or letter setting forth the name of such Holder, the principal
amount of Transfer Restricted Notes delivered for exchange, and a statement
that such Holder is withdrawing its election to have such Notes exchanged;
and
(v) otherwise comply with all applicable laws relating to the
Exchange Offer.
As soon as practicable after the close of the Exchange Offer, the Company
shall:
(i) accept for exchange Transfer Restricted Notes duly tendered
and not validly withdrawn pursuant to the Exchange Offer in accordance with
the terms of the Exchange Offer Registration Statement and the letter of
transmittal which is an exhibit thereto;
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(ii) deliver, or cause to be delivered, to the Trustee for
cancellation all Transfer Restricted Notes so accepted for exchange by the
Company; and
(iii) cause the Trustee promptly to authenticate and deliver
Exchange Notes to each Holder of Transfer Restricted Notes equal in
principal amount to the principal amount of the Transfer Restricted Notes
of such Holder so accepted for exchange.
Interest will accrue on each Exchange Note exchanged for a Note, in either
case from the last date on which interest was paid on the Notes surrendered in
exchange therefor. If no interest has been paid on the Notes, such interest
will be payable from February 23, 2000. The Exchange Offer shall not be subject
to any conditions, other than (i) that the Exchange Offer, or the making of any
exchange by a Holder, does not violate applicable law or any applicable
interpretation of the staff of the SEC and (ii) the proper tendering of Transfer
Restricted Notes in accordance with the Exchange Offer. Each Holder of Transfer
Restricted Notes (other than Participating Broker-Dealers) who wishes to
exchange such Transfer Restricted Notes for Exchange Notes in the Exchange Offer
shall have represented that (i) it is not an affiliate (as defined in Rule 405
under the 1933 Act) of the Company, or, if it is such an affiliate, it will
comply with the registration and prospectus delivery requirements of the 1933
Act to the extent applicable, (ii) any Exchange Notes to be received by it will
be acquired in the ordinary course of its business, (iii) at the time of the
commencement of the Exchange Offer it has no arrangement with any person to
participate in the distribution (within the meaning of the 1933 Act) of the
Exchange Notes and (iv) it shall have made such other representations as may be
reasonably necessary under applicable SEC rules, regulations or interpretations
to render the use of Form S-4 or another appropriate form under the 1933 Act
available. To the extent permitted by law and ascertainable by the Company, the
Company shall inform the Initial Purchasers of the names and addresses of the
Holders to whom the Exchange Offer is made, and the Initial Purchasers shall
have the right to contact such Holders and otherwise facilitate the tender of
Transfer Restricted Notes in the Exchange Offer.
(b) Shelf Registration. If (i) because of any change in law or applicable
interpretations thereof by the staff of the SEC, the Company is not permitted to
effect the Exchange Offer as contemplated by Section 2(a) hereof, (ii) for any
other reason the Exchange Offer is not consummated within 180 days following the
Original Issue Date, (iii) any Holder notifies the Company prior to one year
after the Original Issue Date that (x) due to a change in law or policy it is
not entitled to participate in the Exchange Offer, (y) due to a change in law or
policy it may not resell the Exchange Notes acquired by it in the Exchange Offer
to the public without delivering a prospectus, and the prospectus contained in
the Exchange Offer Registration Statement is not appropriate or available for
such resales by such Holder, and such prospectus is not promptly amended or
modified in order to be suitable for use in connection with such resales for
such Holder and all similarly situated Holders or (z) it is a broker-dealer and
owns Notes acquired directly from the Company or an affiliate of the Company or
(iv) a majority of the Holders may not resell the Exchange Notes acquired by
them in the Exchange Offer to the public without restriction under the
Securities Act and without restriction under applicable blue sky or state
securities laws, then the Company shall, at its cost:
(A) use its best efforts to, prior to the later of (I) the date that
is 90 days after the Original Issue Date and (II) the date that is 30 days
after the filing obligation arises, file with the SEC a Shelf Registration
Statement relating to the offer and sale of the
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Transfer Restricted Notes by the Holders from time to time in accordance
with the methods of distribution elected by the Majority Holders of such
Transfer Restricted Notes and set forth in such Shelf Registration
Statement, and use their best efforts to cause such Shelf Registration
Statement to be declared effective under the Securities Act as promptly as
possible, but in any event within 60 days after the filing obligation
arises; provided that, if the filing obligation arises pursuant to clause
(ii) above, then the Company shall file the Shelf Registration Statement on
or prior to 210 days after the Original Issue Date; and provided further
that, with respect to Exchange Notes received by a broker-dealer in
exchange for any securities that were acquired by such broker-dealer as a
result of market making or other trading activities, the Company may, if
permitted by current interpretations by the Commission's staff, file a
post-effective amendment to the Exchange Offer Registration Statement
containing the information required by Regulation S-K Items 507 and/or 508,
as applicable, in satisfaction of its obligations under this paragraph (A)
solely with respect to broker-dealers who acquired their Notes as a result
of market making or other trading activities, and any such Exchange Offer
Registration Statement, as so amended, shall be referred to herein as, and
governed by the provisions herein applicable to, a Shelf Registration
Statement. If the Company is required to file a Shelf Registration
Statement pursuant to clause (iii) above or pursuant to clause (iv) above,
then the Company shall file and use its best efforts to have declared
effective by the SEC both an Exchange Offer Registration Statement pursuant
to Section 2(a) with respect to all Transfer Restricted Notes and a Shelf
Registration Statement (which may be a combined Registration Statement with
the Exchange Offer Registration Statement) with respect to offers and sales
of Transfer Restricted Notes held by such Holder or such Initial Purchaser
entitled to the rights under Section 2(b)(iii), as applicable, after
completion of the Exchange Offer;
(B) use its best efforts to keep the Shelf Registration Statement
continuously effective in order to permit the Prospectus forming part
thereof to be usable by Holders for a period of two years after its
effective date or such shorter period which will terminate when all of the
Transfer Restricted Notes covered by the Shelf Registration Statement
either have been sold pursuant to the Shelf Registration Statement or have
ceased to be Transfer Restricted Notes; and
(C) notwithstanding any other provisions hereof, ensure that (i) any
Shelf Registration Statement and any amendment thereto and any Prospectus
forming a part thereof and any supplement thereto complies in all material
respects with the 1933 Act and the rules and regulations thereunder, (ii)
any Shelf Registration Statement and any amendment thereto does not, when
it becomes effective, contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading, and (iii) any Prospectus
forming part of any Shelf Registration Statement, and any supplement to
such Prospectus (as amended or supplemented from time to time), does not
include an untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
The Company further agrees, if necessary, to supplement or amend the Shelf
Registration Statement if reasonably requested by the Majority Holders with
respect to information relating to the Holders and otherwise as required by
Section 3(b) below, to use all reasonable efforts to
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<PAGE>
cause any such amendment to become effective and such Shelf Registration to
become usable as soon as practicable thereafter and to furnish to the Holders of
Transfer Restricted Notes copies of any such supplement or amendment promptly
after its being used or filed with the SEC.
(c) Expenses. The Company shall pay all Registration Expenses in
connection with the registration pursuant to Section 2(a) and 2(b) and, in the
case of any Shelf Registration Statement, will reimburse the Holders entitled to
the rights under Section 2(b) for the reasonable fees and disbursements of one
counsel designated in writing by the Majority Holders to act as counsel for the
Holders of the Transfer Restricted Notes in connection therewith. Each Holder
shall pay all expenses of its counsel other than as set forth in the preceding
sentence, underwriting discounts and commissions (and any other fees or costs of
the underwriter) and transfer taxes, if any, relating to the sale or disposition
of such Holder's Transfer Restricted Notes pursuant to the Shelf Registration
Statement.
(d) Effective Registration Statement.
(i) The Company will be deemed not to have used its best efforts to
cause a Registration Statement to become, or to remain, effective during
the requisite periods set forth herein if the Company voluntarily takes any
action that could reasonably be expected to result in any such Registration
Statement not being declared effective or in the Holders of Transfer
Restricted Notes covered thereby not being able to exchange or offer and
sell such Transfer Restricted Notes during that period unless (A) such
action is required by applicable law or (B) such action is taken by the
Company in good faith and for valid business reasons (but not including
avoidance of the Company's obligations hereunder), including a material
corporate transaction, so long as the Company promptly complies with the
requirements of Section 3(k) hereof, if applicable.
(ii) An Exchange Offer Registration Statement pursuant to Section
2(a) hereof or a Shelf Registration Statement pursuant to Section 2(b)
hereof will not be deemed to have become effective unless it has been
declared effective by the SEC; provided, however, that if, after it has
been declared effective, the offering of Transfer Restricted Notes pursuant
to a Registration Statement is interfered with by any stop order,
injunction or other order or requirement of the SEC or any other
governmental agency or court, such Registration Statement will be deemed
not to have been effective during the period of such interference, until
the offering of Transfer Restricted Notes pursuant to such Registration
Statement may legally resume.
(iii) During any 365-day period, the Company may suspend the
availability of a Shelf Registration Statement and the use of the related
Prospectus, as provided in Section 3(e)(vi) and the last paragraph of
Section 3 hereof, for a period of up to 60 consecutive days (except for the
consecutive 60-day period immediately prior to maturity of the Notes), if
any event shall occur as a result of which it shall be necessary, in the
good faith determination of the board of directors of the Company, to amend
the Shelf Registration Statement or amend or supplement any prospectus or
prospectus supplement thereunder in order that each such document not
include any untrue statement of material fact or omit to state a material
fact necessary to make the statements therein not misleading in light of
the circumstances under which they were made.
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<PAGE>
(e) Accrual and Payment of Additional Interest. In the event that (i) the
Exchange Offer Registration Statement is not filed with the SEC on or prior to
the 90th calendar day following the Original Issue Date, (ii) the Exchange Offer
Registration Statement is not declared effective on or prior to the 150th
calendar day following the Original Issue Date, (iii) the Exchange Offer is not
consummated on or prior to the 30th calendar day after the date on which the
Exchange Offer Registration Statement is declared effective, (iv) if required, a
Shelf Registration Statement with respect to the Notes is not declared effective
on or prior to the 60th calendar day following the date on which the obligation
to file such registration statement arises or (v) the Exchange Offer
Registration Statement or the Shelf Registration Statement is declared effective
but thereafter ceases to be effective or usable except in accordance with
Section 2(d)(iii) hereof (each event referred to in clauses (i) through (v)
above, a "Registration Default"), the Notes shall, with respect to each
Registration Default, accrue interest, as liquidated damages ("Additional
Interest"), at a rate of one-half of one percent per annum of the principal
amount of the Notes commencing upon the occurrence of such Registration Default,
which rate will increase by one-half of one percent at the end of each 90-day
period in which such Registration Default is not cured, provided that the
maximum aggregate Additional Interest that accrues on the principal amount of
the Restricted Notes as a result of all Registration Defaults will in no event
exceed one and one-half percent (1.5%) per annum. Additional Interest shall be
computed based on the actual number of days elapsed in each 90-day period in
which Additional Interest accrues on the Notes.
The Company shall notify the Trustee within three Business Days after
the occurrence of each Registration Default. Additional Interest payable with
respect to any Note shall be due and payable on each February 15 and August 15
(each an "Additional Interest Payment Date") if Additional Interest has accrued
on such Note during the semi-annual period immediately preceding such Additional
Interest Payment Date, to the Person in whose name such Note (or one or more
Predecessor Notes) is registered at the close of business on the February 1 or
August 1, whether or not a Business Day, next preceding such Additional Interest
Payment Date. Each obligation to pay Additional Interest shall be deemed to
accrue from and including the day following the occurrence of the applicable
Registration Default.
Upon (v) the filing of the Exchange Offer Registration Statement after the
90-day period described in clause (i) above, (w) the effectiveness of the
Exchange Offer Registration Statement after the 150-day period described in
clause (ii) above, (x) the consummation of the Exchange Offer after the 30-day
period described in clause (iii) above, (y) the effectiveness of a Shelf
Registration Statement after the 60-day period described in clause (iv) above,
or (z) the cure of any Registration Default described in clause (v) above, such
Additional Interest shall cease to accrue on the Notes from the date of such
filing, effectiveness, consummation or cure, as the case may be, if the Company
is otherwise in compliance with this paragraph; provided, however, that if,
after any such Additional Interest ceases to accrue, a different event specified
in clause (i), (ii), (iii), (iv) or (v) above occurs, such Additional Interest
shall begin to accrue again pursuant to the foregoing provisions.
(f) Specific Enforcement. Without limiting the remedies available to the
Initial Purchasers and the Holders, the Company acknowledges (i) that any
failure by it to comply with its obligations under Sections 2(a) and 2(b) hereof
may result in material irreparable injury to the Initial Purchasers or the
Holders for which there is no adequate remedy at law, (ii) that it will not be
possible to measure damages for such injuries precisely and (iii) that, in the
event of any such
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failure, the Initial Purchasers or any Holder may obtain such relief as may be
required to specifically enforce the Company's obligations under Sections 2(a)
and 2(b).
3. Registration Procedures.
In connection with the obligations of the Company with respect to the
Registration Statements pursuant to Sections 2(a) and 2(b) hereof, the Company
shall:
(a) prepare and file with the SEC a Registration Statement, within the
time period specified in Section 2, on the appropriate form under the 1933 Act,
which form (i) shall be selected by the Company, (ii) shall, in the case of a
Shelf Registration, be available for the sale of the Transfer Restricted Notes
by the selling Holders thereof entitled to the rights under Section 2(b) and
(iii) shall comply as to form in all material respects with the requirements of
the applicable form and include or incorporate by reference all financial
statements required by the SEC to be filed therewith, and use its best efforts
to cause such Registration Statement to become effective and remain effective in
accordance with Section 2 hereof;
(b) prepare and file with the SEC such amendments and post-effective
amendments to each Registration Statement as may be necessary under applicable
law to keep such Registration Statement effective for the applicable period;
cause each Prospectus to be supplemented by any required prospectus supplement,
and as so supplemented to be filed pursuant to Rule 424 under the 1933 Act; and
comply with the provisions of the 1933 Act with respect to the disposition of
all securities covered by each Registration Statement during the applicable
period in accordance with the intended method or methods of distribution by the
selling Holders thereof;
(c) in the case of a Shelf Registration, (i) notify each Holder of
Transfer Restricted Notes, at least ten days prior to filing, that a Shelf
Registration Statement with respect to the Transfer Restricted Notes is being
filed and advising such Holders that the distribution of Transfer Restricted
Notes will be made in accordance with the method elected by the Majority
Holders; and (ii) furnish to each Holder of Transfer Restricted Notes, to
counsel for the Initial Purchasers, to counsel for the Holders and to each
underwriter of an underwritten offering of Transfer Restricted Notes, if any,
without charge, as many copies of each Prospectus, including each preliminary
Prospectus, and any amendment or supplement thereto and such other documents as
such Holder or underwriter may reasonably request, including financial
statements and schedules and, if the Holder so requests, all exhibits (including
those incorporated by reference) in order to facilitate the public sale or other
disposition of the Transfer Restricted Notes; and (iii) subject to Section
2(d)(iii) and the last paragraph of this Section 3, hereby consent to the use of
the Prospectus, including each preliminary Prospectus, or any amendment or
supplement thereto by each of the selling Holders of Transfer Restricted Notes
in connection with the offering and sale of the Transfer Restricted Notes
covered by the Prospectus or any amendment or supplement thereto;
(d) use its reasonable best efforts to register or qualify the Transfer
Restricted Notes under all applicable state securities or "blue sky" laws of
such jurisdictions as any Holder of Transfer Restricted Notes covered by a
Registration Statement and each underwriter of an underwritten offering of
Transfer Restricted Notes shall reasonably request by the time the Registration
Statement is declared effective by the SEC, to cooperate with the Holders in
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connection with any filings required to be made with the NASD and do any and all
other acts and things which may be reasonably necessary or reasonably advisable
to enable such Holder to consummate the disposition in each such jurisdiction of
such Transfer Restricted Notes owned by such Holder; provided, however, that the
Company shall not be required to (i) qualify as a foreign corporation or as a
dealer in securities in any jurisdiction where it would not otherwise be
required to qualify but for this Section 3(d) or (ii) take any action which
would subject it to general service of process or taxation in any such
jurisdiction if it is not then so subject;
(e) in the case of a Shelf Registration, notify each Holder of Transfer
Restricted Notes entitled to the rights under Section 2(b) and counsel for such
Holders promptly and, if requested by such Holder or counsel, confirm such
advice in writing promptly (i) when a Registration Statement has become
effective and when any post-effective amendments and supplements thereto become
effective, (ii) of any request by the SEC or any state securities authority for
post-effective amendments and supplements to a Registration Statement and
Prospectus or for additional information after the Registration Statement has
become effective, (iii) of the issuance by the SEC or any state securities
authority of any stop order suspending the effectiveness of a Registration
Statement or the initiation of any proceedings for that purpose, (iv) if, during
the period a Registration Statement is effective, the representations and
warranties of the Company contained in any underwriting agreement, securities
sales agreement or other similar agreement, if any, relating to such offering
cease to be true and correct in all material respects, (v) of the receipt by the
Company of any notification with respect to the suspension of the qualification
of the Transfer Restricted Notes for sale in any jurisdiction or the initiation
or threatening of any proceeding for such purpose, (vi) of the happening of any
event or the discovery of any facts during the period a Shelf Registration
Statement is effective (including as contemplated in Section 2(d)(iii) hereof)
which makes any statement made in such Registration Statement or the related
Prospectus untrue in any material respect or which requires the making of any
changes in such Registration Statement or Prospectus in order to make the
statements therein not misleading and (vii) of any determination by the Company
that a post-effective amendment to a Registration Statement would be
appropriate;
(f) (A) in the case of the Exchange Offer, (i) include in the Exchange
Offer Registration Statement a "Plan of Distribution" section covering the
use of the Prospectus included in the Exchange Offer Registration Statement
by broker-dealers who have exchanged their Transfer Restricted Notes for
Exchange Notes for the resale of such Exchange Notes, (ii) furnish to each
broker-dealer who desires to participate in the Exchange Offer, without
charge, as many copies of each Prospectus included in the Exchange Offer
Registration Statement, including any preliminary prospectus, and any
amendment or supplement thereto, as such broker-dealer may reasonably
request within 180 days following the date of effectiveness of the Exchange
Offer Registration Statement, (iii) include in the Exchange Offer
Registration Statement a statement that any broker-dealer who holds
Transfer Restricted Notes acquired for its own account as a result of
market-making activities or other trading activities (a "Participating
Broker-Dealer"), and who receives Exchange Notes for Transfer Restricted
Notes pursuant to the Exchange Offer, may be a statutory underwriter and
must deliver a prospectus meeting the requirements of the 1933 Act in
connection with any resale of such Exchange Notes, (iv) subject to the last
paragraph of Section 3, hereby consent to the use of the Prospectus forming
part of the Exchange Offer Registration Statement or any amendment or
supplement thereto, by any broker-dealer in connection with the sale
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or transfer of the Exchange Notes covered by the Prospectus or any
amendment or supplement thereto, and (v) include in the transmittal letter
or similar documentation to be executed by an exchange offeree in order to
participate in the Exchange Offer the following provision:
"If the undersigned is not a broker-dealer, the undersigned represents that
it is not engaged in, and does not intend to engage in, a distribution of
Exchange Notes. If the undersigned is a broker-dealer that will receive
Exchange Notes for its own account in exchange for Transfer Restricted
Notes, it represents that the Transfer Restricted Notes to be exchanged for
Exchange Notes were acquired by it as a result of market-making activities
or other trading activities and acknowledges that it will deliver a
prospectus meeting the requirements of the 1933 Act in connection with any
resale of such Exchange Notes pursuant to the Exchange Offer; however, by
so acknowledging and by delivering a prospectus, the undersigned will not
be deemed to admit that it is an "underwriter" within the meaning of the
1933 Act;"
(B) to the extent any Participating Broker-Dealer participates in the
Exchange Offer, the Company shall use its best efforts to cause to be
delivered at the request of an entity representing the Participating
Broker-Dealers (which entity shall be one of the Initial Purchasers, unless
it elects not to act as such representative) only one, if any, "cold
comfort" letter with respect to the Prospectus in the form existing on the
last date for which exchanges are accepted pursuant to the Exchange Offer
and with respect to each subsequent amendment or supplement, if any,
effected during the period specified in clause (C) below;
(C) to the extent any Participating Broker-Dealer participates in the
Exchange Offer, the Company shall use its best efforts to maintain the
effectiveness of the Exchange Offer Registration Statement for a period of
180 days following the closing of the Exchange Offer; and
(D) the Company shall not be required to amend or supplement the
Prospectus contained in the Exchange Offer Registration Statement as would
otherwise be contemplated by Section 3(b) hereof, or take any other action
as a result of this Section 3(f), for a period exceeding 180 days after the
last date for which exchanges are accepted pursuant to the Exchange Offer
(as such period may be extended by the Company) and Participating Broker-
Dealers shall not be authorized by the Company to, and shall not, deliver
such Prospectus after such period in connection with resales contemplated
by this Section 3.
(g) (A) in the case of an Exchange Offer, furnish counsel for the
Initial Purchasers and (B) in the case of a Shelf Registration, furnish counsel
for the Holders of Transfer Restricted Notes copies of any request by the SEC or
any state securities authority for amendments or supplements to a Registration
Statement and Prospectus or for additional information;
(h) make every reasonable effort to obtain the withdrawal of any order
suspending the effectiveness of a Registration Statement as soon as practicable
and provide immediate notice to each Holder of the withdrawal of any such order;
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(i) in the case of a Shelf Registration, furnish to each Holder entitled
to the rights under Section 2(b), without charge, at least one conformed copy of
each Registration Statement and any post-effective amendment thereto (without
documents incorporated therein by reference or exhibits thereto, unless
requested);
(j) in the case of a Shelf Registration, cooperate with the selling
Holders entitled to the rights under Section 2(b) to facilitate the timely
preparation and delivery of any certificates representing Transfer Restricted
Notes to be sold and not bearing any restrictive legends; and cause such
Transfer Restricted Notes to be in such denominations (consistent with the
provisions of the Indenture) in a form eligible for deposit with the Depositary
and registered in such names as the selling Holders or the underwriters, if any,
may reasonably request in writing at least one business day prior to the closing
of any sale of Transfer Restricted Notes;
(k) in the case of a Shelf Registration, upon the occurrence of any event
or the discovery of any facts, each as contemplated by Section 3(e)(vi) hereof,
use their best efforts to prepare a supplement or post-effective amendment to a
Registration Statement or the related Prospectus or any document incorporated
therein by reference or file any other required document so that, as thereafter
delivered to the purchasers of the Transfer Restricted Notes, such Prospectus
will not contain at the time of such delivery any untrue statement of a material
fact or omit to state a material fact necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading. The
Company agrees to notify each Holder to suspend use of the Prospectus as
promptly as practicable after the occurrence of such an event, and each Holder
hereby agrees to suspend use of the Prospectus until the Company has amended or
supplemented the Prospectus to correct such misstatement or omission. At such
time as such public disclosure is otherwise made or the Company determines that
such disclosure is not necessary, in each case to correct any misstatement of a
material fact or to include any omitted material fact, the Company agrees
promptly to notify each Holder of such determination and to furnish each Holder
such numbers of copies of the Prospectus, as amended or supplemented, as such
Holder may reasonably request;
(l) obtain CUSIP numbers for all Exchange Notes, or Transfer Restricted
Notes, as the case may be, not later than the effective date of a Registration
Statement, and provide the Trustee with any necessary printed certificates for
the Exchange Notes in a form eligible for deposit with the Depositary;
(m) (i) cause the Indenture to be qualified under the Trust Indenture Act
of 1939, as amended (the "TIA"), in connection with the registration of the
Exchange Notes, or Transfer Restricted Notes, as the case may be, (ii) cooperate
with the Trustee and the Holders to effect such changes to the Indenture as may
be required for the Indenture to be so qualified in accordance with the terms of
the TIA and (iii) execute, and use its best efforts to cause the Trustee to
execute, all documents as may be required to effect such changes, and all other
forms and documents required to be filed with the SEC to enable the Indenture to
be so qualified in a timely manner;
(n) in the case of a Shelf Registration, enter into agreements (including
underwriting agreements) and take all other customary and appropriate actions
(including those reasonably requested by the Holders of a majority in principal
amount of the Transfer Restricted Notes being sold under Section 2(b)) in order
to expedite or facilitate the disposition of such Transfer
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Restricted Notes and in such connection, whether or not an underwriting
agreement is entered into and whether or not the registration is an underwritten
registration:
(i) make such representations and warranties to the Holders of such
Transfer Restricted Notes and the underwriters, if any, in form, substance
and scope as are customarily made by issuers to underwriters in similar
underwritten offerings as may be reasonably requested by them;
(ii) obtain opinions of counsel to the Company and updates thereof
(which counsel and opinions (in form, scope and substance) shall be
reasonably satisfactory to the managing underwriters, if any, and the
Holders of a majority in principal amount of the Transfer Restricted Notes
being sold) addressed to each selling Holder and the underwriters, if any,
covering the matters customarily covered in opinions requested in sales of
securities or underwritten offerings and such other matters as may be
reasonably requested by such Holders and underwriters;
(iii) obtain "cold comfort" letters and updates thereof from the
Company's independent certified public accountants addressed to the
underwriters, if any, and to the selling Holders of Transfer Restricted
Notes, such letters to be in customary form and covering matters of the
type customarily covered in "cold comfort" letters to underwriters in
connection with similar underwritten offerings;
(iv) enter into a securities sales agreement with the Holders and an
agent of the Holders providing for, among other things, the appointment of
such agent for the selling Holders for the purpose of soliciting purchases
of Transfer Restricted Notes, which agreement shall be in form, substance
and scope customary for similar offerings;
(v) if an underwriting agreement is entered into in the case of an
underwritten offering, cause the same to set forth indemnification
provisions and procedures substantially equivalent to the indemnification
provisions and procedures set forth in Section 5 hereof with respect to the
underwriters and all other parties to be indemnified pursuant to Section 5
hereof; and
(vi) deliver such documents and certificates as may be reasonably
requested and as are customarily delivered in similar offerings.
The above shall be done at (i) the effectiveness of such Registration
Statement (and, if appropriate, each post-effective amendment thereto) and (ii)
each closing under any underwriting or similar agreement as and to the extent
required thereunder. In the case of any underwritten offering, the Company
shall provide written notice to the Holders of all Transfer Restricted Notes not
then exchanged for Exchange Notes of such underwritten offering at least 30 days
prior to the filing of a prospectus supplement for such underwritten offering.
Such notice shall (x) offer each such Holder the right to participate in such
underwritten offering, (y) specify a date, which shall be no earlier than 10
days following the date of such notice, by which such Holder must inform the
Company of its intent to participate in such underwritten offering and (z)
include the instructions such Holder must follow in order to participate in such
underwritten offering;
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(o) in the case of a Shelf Registration, make available for inspection by
representatives of the Holders entitled to rights under Section 2(b) and any
underwriters participating in any disposition pursuant to a Shelf Registration
Statement and any U.S. counsel or accountant retained by such Holders or
underwriters, all financial and other records, pertinent corporate documents and
properties of the Company reasonably requested by any such Persons, and cause
the respective officers, directors, employees and any other agents of the
Company to supply all information reasonably requested by any such
representative, underwriter, special counsel or accountant in connection with a
Registration Statement; provided that any such records, documents, properties
and such information that is designated in writing by the Company, in good
faith, as confidential at the time of delivery of such records, documents,
properties or information shall be kept confidential by any such representative,
underwriter, special counsel or accountant and shall be used only in connection
with such Registration Statement, unless disclosure thereof is made in
connection with a court proceeding or required by law, or such information has
become available (not in violation of this agreement) to the public generally or
through a third party without an accompanying obligation of confidentiality, and
the Company shall be entitled to request that such representative, underwriter,
special counsel or accountant sign a confidentiality agreement to the foregoing
effect;
(p) (i) in the case of an Exchange Offer, a reasonable time prior to the
filing of any Exchange Offer Registration Statement, any Prospectus forming a
part thereof, any amendment to an Exchange Offer Registration Statement or
amendment or supplement to a Prospectus, provide copies of such document to the
Initial Purchasers, and make such changes in any such document prior to the
filing thereof as the Initial Purchasers or their counsel may reasonably
request; (ii) in the case of a Shelf Registration, a reasonable time prior to
filing any Shelf Registration Statement, any Prospectus forming a part thereof,
any amendment to such Shelf Registration Statement or amendment or supplement to
such Prospectus, provide copies of such document to the Holders entitled to
rights under Section 2(b), to the Initial Purchasers, to counsel on behalf of
such Holders and to the underwriter or underwriters of an underwritten offering
of Transfer Restricted Notes, if any, and make such changes in any such document
prior to the filing thereof as counsel to the Initial Purchasers or any
underwriter may reasonably request; and (iii) cause the representatives of the
Company to be available for discussion of such document as shall be reasonably
requested by the Holders of Transfer Restricted Notes, the Initial Purchasers on
behalf of such Holders or any underwriter, and shall not at any time make any
filing of any such document of which such Holders, the Initial Purchasers on
behalf of such Holders, their counsel or any underwriter shall not have
previously been advised and furnished a copy or to which such Holders, the
Initial Purchasers on behalf of such Holders, their counsel or any underwriter
shall reasonably object within a reasonable time period;
(q) otherwise use its best efforts to comply with all applicable rules and
regulations of the SEC and make available to its security holders, as soon as
reasonably practicable (but not until the end of the first full fiscal quarter
following effectiveness), an earnings statement covering at least 12 months
which shall satisfy the provisions of Section 11(a) of the 1933 Act and Rule 158
thereunder; and
(r) cooperate and assist in any filings required to be made with the NASD
and in the performance of any due diligence investigation by any underwriter and
its counsel.
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In the case of a Shelf Registration Statement, the Company may (as a
condition to such Holder's participation in the Shelf Registration) require each
Holder of Transfer Restricted Notes to furnish to the Company such information
regarding such Holder and the proposed distribution by such Holder of such
Transfer Restricted Notes as the Company may from time to time reasonably
request in writing.
In the case of (1) a Shelf Registration Statement or (2) Participating
Broker-Dealers utilizing the Prospectus contained in the Exchange Offer
Registration Statement as provided in Section 3(f) hereof, that are seeking to
sell Exchange Notes and are required to deliver Prospectuses, each Holder agrees
that, upon receipt of any notice from the Company of the happening of any event
or the discovery of any facts, each of the kind described in Sections 3(e)(ii)
to (vii) hereof, such Holder will forthwith discontinue disposition of Transfer
Restricted Notes pursuant to a Registration Statement until such Holder's
receipt of the copies of the supplemented or amended Prospectus contemplated by
Section 3(k) hereof or until it is advised in writing by the Company that the
use of the applicable Prospectus may be resumed, and, if so directed by the
Company, such Holder will deliver to the Company (at their expense) all copies
in its possession, other than permanent file copies then in such Holder's
possession, of the Prospectus covering such Transfer Restricted Notes or
Exchange Notes, as the case may be, current at the time of receipt of such
notice. Each Holder agrees to keep confidential the cause of any such notice of
suspension or other information provided to them by the Company with respect
thereto or any other event which would materially adversely affect the Company.
If the Company shall give any such notice to suspend the disposition of Transfer
Restricted Notes or Exchange Notes, as the case may be, pursuant to a
Registration Statement as a result of the happening of any event or the
discovery of any facts, each of the kind described in Section 3(e)(vi) hereof,
the Company shall be deemed to have used its best efforts to keep the Shelf
Registration Statement effective during such period of suspension; provided that
(i) such period of suspension shall not exceed the time periods provided in
Section 2(d)(iii) hereof and (ii) the Company shall use its reasonable best
efforts to file and have declared effective (if an amendment) as soon as
practicable an amendment or supplement to the Shelf Registration Statement and
shall extend the period during which the Registration Statement shall be
maintained effective pursuant to this Agreement by the number of days during the
period from and including the date of the giving of such notice to and including
the date when the Holders shall have received copies of the supplemented or
amended Prospectus necessary to resume such dispositions.
4. Underwritten Registrations.
If any of the Transfer Restricted Notes covered by any Shelf Registration
are to be sold in an underwritten offering, the investment banker or investment
bankers and manager or managers that will manage the offering will be selected
by the Majority Holders of such Transfer Restricted Notes included in such
offering, provided such banker or manager is acceptable to the Company, acting
reasonably.
No Holder of Transfer Restricted Notes may participate in any underwritten
registration hereunder unless such Holder (a) agrees to sell such Holder's
Transfer Restricted Notes on the basis provided in any underwriting arrangements
approved by the Persons entitled hereunder to approve such arrangements and (b)
completes and executes all questionnaires, powers of
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attorney, indemnities, underwriting agreements and other documents required
under the terms of such underwriting arrangements.
5. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless each Initial
Purchaser, each Holder, including Participating Broker-Dealers, each underwriter
who participates in an offering of Transfer Restricted Notes, their respective
affiliates, and their respective directors, officers, employees, agents and each
Person, if any, who controls any of such parties within the meaning of Section
15 of the 1933 Act or Section 20 of the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement of a material fact contained in any Registration Statement
(or any amendment thereto) pursuant to which Exchange Notes or Transfer
Restricted Notes were registered under the 1933 Act, including all
documents incorporated therein by reference, or the omission or alleged
omission therefrom of a material fact required to be stated therein or
necessary to make the statements therein not misleading or arising out of
any untrue statement or alleged untrue statement of a material fact
contained in any Prospectus (or any amendment or supplement thereto) or the
omission or alleged omission therefrom of a material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever, in each case, based upon any such untrue statement or omission,
or any such alleged untrue statement or omission; provided that (subject to
Section 5(d) below) any such settlement is effected with the written
consent of the Company; and
(iii) against any and all expenses whatsoever, as incurred
(including the reasonable fees and disbursements of one counsel chosen by
any indemnified party), reasonably incurred in investigating, preparing or
defending against any litigation, or any investigation or proceeding by any
court or governmental agency or body, commenced or threatened, or any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission, to the extent that any such expense
is not paid under subparagraph (i) or (ii) of this Section 5(a);
provided, however, that this indemnity agreement does not apply to any loss,
liability, claim, damage or expense to the extent (i) arising out of an untrue
statement or omission or alleged untrue statement or omission (A) made in or
omitted from a Preliminary Prospectus or registration statement and corrected or
included in a subsequent Prospectus or registration statement or any amendment
or supplement thereto made in reliance upon and in conformity with written
information furnished to the Company by the Initial Purchasers, any Holder,
including Participating Broker-Dealers, or any underwriter expressly for use in
the Registration Statement (or any amendment thereto) or the Prospectus (or any
amendment or supplement thereto) or (B) resulting from the use of the Prospectus
during a period when the use of the
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Prospectus has been suspended in accordance with Section 2(d)(iii), Section
3(e)(vi) and the last paragraph of Section 3 hereof, provided, in each case,
that Holders received prior notice of such suspension.
(b) In the case of an Exchange Offer Registration or a Shelf Registration,
each Holder agrees, severally and not jointly, to indemnify and hold harmless
the Company, each Initial Purchaser, each underwriter who participates in an
offering of Transfer Restricted Notes and the other selling Holders and each of
their respective directors and officers (including each officer of the Company
who signed the Registration Statement) and each Person, if any, who controls the
Company, any Initial Purchaser, any underwriter or any other selling Holder
within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act,
against any and all loss, liability, claim, damage and expense described in the
indemnity contained in Section 5(a) hereof, as incurred, but only with respect
to untrue statements or omissions, or alleged untrue statements or omissions,
made in the Registration Statement (or any amendment thereto) or the Prospectus
(or any amendment or supplement thereto) in reliance upon and in conformity with
written information furnished to the Company by such Holder expressly for use in
the Registration Statement (or any amendment thereto), or the Prospectus (or any
amendment or supplement thereto); provided, however, that no such Holder shall
be liable for any claims hereunder in excess of the amount of net proceeds
received by such Holder from the sale of Transfer Restricted Notes pursuant to
such Registration Statement.
(c) In case any action shall be commenced involving any Person in respect
of which indemnity may be sought pursuant to either paragraph (a) or (b) above,
such Person (the "indemnified party") shall give notice as promptly as
reasonably practicable to each Person against whom such indemnity may be sought
(the "indemnifying party"), but failure to so notify an indemnifying party shall
not relieve such indemnifying party from any liability hereunder to the extent
it is not materially prejudiced as a result thereof and in any event shall not
relieve it from any liability which it may have otherwise than on account of
this indemnity agreement. An indemnifying party may participate at its own
expense in the defense of such action; provided, however, that counsel to the
indemnifying party shall not (except with the consent of the indemnified party)
also be counsel to the indemnified party. In no event shall the indemnifying
party or parties be liable for the fees and expenses of more than one counsel
(in addition to any local counsel) separate from their own counsel for all
indemnified parties in connection with any one action or separate but similar or
related actions in the same jurisdiction arising out of the same general
allegations or circumstances. No indemnifying party shall, without the prior
written consent of the indemnified parties, settle or compromise or consent to
the entry of any judgment with respect to any litigation, or any investigation
or proceeding by any governmental agency or body, commenced or threatened, or
any claim whatsoever in respect of which indemnification or contribution could
be sought under this Section 5 (whether or not the indemnified parties are
actual or potential parties thereof), unless such settlement, compromise or
consent (i) includes an unconditional release of each indemnified party from all
liability arising out of such litigation, investigation, proceeding or claim and
(ii) does not include a statement as to or an admission of fault, culpability or
a failure to act by or on behalf of any indemnified party.
(d) If at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for fees and expenses of
counsel, such indemnifying party agrees that it shall be liable for any
settlement of the nature contemplated by Section 5(a)(ii)
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hereof effected without its written consent if (i) such settlement is entered
into more than 45 days after receipt by such indemnifying party of the aforesaid
request, (ii) such indemnifying party shall have received notice of the terms of
such settlement at least 30 days prior to such settlement being entered into and
(iii) such indemnifying party shall not have reimbursed such indemnified party
in accordance with such request prior to the date of such settlement.
(e) If the indemnification provided for in any of the indemnity provisions
set forth in this Section 5 is for any reason unavailable to or insufficient to
hold harmless an indemnified party in respect of any losses, liabilities,
claims, damages or expenses referred to therein, then each indemnifying party
shall contribute to the aggregate amount of such losses, liabilities, claims,
damages and expenses incurred by such indemnified party, as incurred, in such
proportion as is appropriate to reflect the relative fault of such indemnifying
party or parties on the one hand, and such indemnified party or parties on the
other hand, in connection with the statements or omissions which resulted in
such losses, liabilities, claims, damages or expenses, as well as any other
relevant equitable considerations, The relative fault of such indemnifying party
or parties on the one hand, and such indemnified party or parties on the other
hand shall be determined by reference to, among other things, whether any such
untrue or alleged untrue statement of a material fact or omission or alleged
omission to state a material fact relates to information supplied by such
indemnifying party or parties or such indemnified party or parties and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Company, the Initial
Purchasers and the Holders of the Transfer Restricted Notes agree that it would
not be just and equitable if contribution pursuant to this Section 5 were
determined by pro rata allocation (even if the Initial Purchasers were treated
as one entity, and the Holders were treated as one entity, for such purpose) or
by another method of allocation which does not take account of the equitable
considerations referred to above in Section 5. The aggregate amount of losses,
liabilities, claims, damages and expenses incurred by an indemnified party and
referred to above in this Section 5 shall be deemed to include any legal or
other expenses reasonably incurred by such indemnified party in investigating,
preparing or defending against any litigation, or any investigation or
proceeding by an governmental agency or body, commenced or threatened, or any
claim whatsoever based upon any such untrue or alleged untrue statement or
omission or alleged omission. No Person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the 1933 Act) shall be entitled to
contribution from any Person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section 5, each Person, if any, who
controls an Initial Purchaser or Holder within the meaning of Section 15 of the
1933 Act or Section 20 of the 1934 Act shall have the same rights to
contribution as such Initial Purchaser or Holder, and each director of the
Company, each officer of the Company who signed the Registration Statement, and
each Person, if any, who controls the Company within the meaning of Section 15
of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to
contribution as the Company.
6. Miscellaneous.
(a) Rule 144 and Rule 144A. For so long as the Company is subject to the
reporting requirements of Section 13 or 15(d) of the 1934 Act, the Company
covenants that it will file the reports required to be filed by it under Section
13(a) or 15(d) of the 1934 Act and the rules and regulations adopted by the SEC
thereunder, and that if it ceases to be so required to file such reports, it
will upon the request of any Holder of Transfer Restricted Notes (i) make
publicly available such information as is necessary to permit sales pursuant to
Rule 144 under the 1933
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Act, (ii) deliver such information to a prospective purchaser as is necessary to
permit sales pursuant to Rule 144A under the 1933 Act and it will take such
further action as any Holder of Transfer Restricted Notes may reasonably
request, and (iii) take such further action that is reasonable in the
circumstances, in each case, to the extent required from time to time to enable
such Holder to sell its Transfer Restricted Notes without registration under the
1933 Act within the limitation of the exemptions provided by (x) Rule 144 under
the 1933 Act, as such Rule may be amended from time to time, (y) Rule 144A under
the 1933 Act, as such Rule may be amended from time to time, or (z) any similar
rules or regulations hereafter adopted by the SEC. Upon the written request of
any Holder of Transfer Restricted Notes, the Company will deliver to such Holder
a written statement as to whether it has complied with such requirements.
(b) No Inconsistent Agreements. The Company has not entered into, nor
will it on or after the date of this Agreement enter into, any agreement that is
inconsistent with the rights granted to the Holders of Transfer Restricted Notes
in this Agreement or that otherwise conflicts with the provisions hereof. The
rights granted to the Holders hereunder do not in any way conflict with, and are
not inconsistent with, the rights granted to the holders of the Company's other
issued and outstanding securities under any agreements or instruments relating
to such securities. Except as set forth in this Agreement, no Person has any
rights to include any securities of the Company in any Registration Statement
required to be filed pursuant to this Agreement.
(c) Amendments and Waivers. The provisions of this Agreement, including
the provisions of this sentence, may not be amended, modified or supplemented,
and waivers or consents to departures from the provisions hereof may not be
given unless the Company has obtained the written consent of Holders of at least
a majority in aggregate principal amount of the outstanding Transfer Restricted
Notes affected by such amendment, modification, supplement, waiver or departure;
provided, however, that no amendment, modification, supplement or waiver or
consent to any departure from the provisions of Section 5 hereof shall be
effective as against any Holder of Transfer Restricted Notes unless consented to
in writing by such Holder.
(d) Notices. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand-delivery, registered first-
class mail, telecopier, or any courier guaranteeing overnight delivery (i) if to
a Holder (other than an Initial Purchaser), at the most current address set
forth on the records of the Registrar under the Indenture, (ii) if to an Initial
Purchaser, at the most current address given by such Initial Purchaser to the
Company by means of a notice given in accordance with the provisions of this
Section 6(d), which address initially is the address set forth in the Purchase
Agreement; and (iii) if to the Company, initially at the address set forth in
the Purchase Agreement and thereafter at such other address, notice of which is
given in accordance with the provisions of this Section 6(d).
All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if personally delivered; five business
days after being deposited in the mail, postage prepaid, if mailed; when receipt
is acknowledged, if telecopied; and on the next business day if timely delivered
to an air courier guaranteeing overnight delivery.
Copies of all such notices, demands, or other communications shall be
concurrently delivered by the Person giving the same to the Trustee, at the
address specified in the Indenture.
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(e) Successors and Assigns. This Agreement shall inure to the benefit of
and be binding upon the successors, assigns and transferees of each of the
parties, including, without limitation and without the need for an express
assignment, subsequent Holders; provided that nothing herein shall be deemed to
permit any assignment, transfer or other disposition of Transfer Restricted
Notes in violation of the terms hereof or of the Purchase Agreement or the
Indenture. If any transferee of any Holder shall acquire Transfer Restricted
Notes, in any manner, whether by operation of law or otherwise, such Transfer
Restricted Notes shall be held subject to all of the terms of this Agreement,
and by taking and holding such Transfer Restricted Notes, such Person shall be
conclusively deemed to have agreed to be bound by and to perform all of the
terms and provisions of this Agreement, including the restrictions on resale set
forth in this Agreement and, if applicable, the Purchase Agreement, and such
Person shall be entitled to receive the benefits hereof.
(f) Third Party Beneficiary. The Holders shall be third party
beneficiaries to the agreements made hereunder between the Company on the one
hand, and the Initial Purchasers, on the other hand, and shall have the right to
enforce such agreements directly to the extent it deems such enforcement
necessary or advisable to protect its rights or the rights of Holders hereunder.
(g) Counterparts. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(h) Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(i) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
(j) Severability. In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstance, is held
invalid, illegal or unenforceable, the validity, legality and enforceability of
any such provision in every other respect and of the remaining provisions
contained herein shall not be affected or impaired thereby.
[signature page follows]
20
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
RHYTHMS NETCONNECTIONS, INC.
By /s/ Scott C. Chandler
---------------------
Scott C. Chandler
Chief Financial Officer
Confirmed and accepted as of
the date first above written:
MERRILL LYNCH & CO.,
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
SALOMON SMITH BARNEY INC.
CHASE SECURITIES INC.
CREDIT SUISSE FIRST BOSTON CORPORATION
By: MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By:
----------------------------------
Authorized Signatory
21
<PAGE>
Exhibit 4.20
REGISTRATION RIGHTS AGREEMENT
Dated as of March 3, 2000
by and among
RHYTHMS NETCONNECTIONS INC.
and
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
and
SALOMON SMITH BARNEY INC.
as Initial Purchasers
<PAGE>
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and entered
into as of March 3, 2000 by and among RHYTHMS NETCONNECTIONS INC., a Delaware
corporation (the "Company"), and MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED (the "Representative") and SALOMON SMITH BARNEY INC. (together with
the Representative, the "Initial Purchasers").
This Agreement is made pursuant to the Purchase Agreement dated as of
February 28, 2000 by and among the Company and the Initial Purchasers (the
"Purchase Agreement"), that provides for, among other things, the sale by the
Company to the Initial Purchasers of up to 3,000,000 shares of 6 3/4% Cumulative
Convertible Preferred Stock, $.001 par value per share (liquidation preference
$100 per share) (the "Preferred Stock"). The Preferred Stock will be convertible
into shares of Common Stock, par value $.001 per share, of the Company (the
"Common Stock") as set forth in the Offering Memorandum dated February 28, 2000,
subject to adjustment in accordance with the Certificate of Designations,
Preferences and Relative, Participating, Optional and Other Special Rights of
Preferred Stock and Qualifications, Limitations and Restrictions (the
"Certificate of Designations"). The Preferred Stock and the Common Stock
issuable upon conversion of the Preferred Stock are collectively herein referred
to as the "Securities" and each of them as held singularly is herein referred to
as a "Security". In order to induce the Initial Purchasers to enter into the
Purchase Agreement, the Company has agreed to provide to the Initial Purchasers
and their direct and indirect transferees and the holders of the Securities from
time to time (each of the foregoing a "Holder" and together the "Holders"), the
registration rights set forth in this Agreement. The execution and delivery of
this Agreement is a condition to the closing under the Purchase Agreement.
In consideration of the foregoing, the parties hereto agree as follows:
1. Shelf Registration. So long as any Transfer Restricted Security (as
defined in Section 5(e) hereof) exists, the Company shall take the following
actions:
(a) The Company shall, at its cost, prepare and, on or before 90 days after
the date of this Agreement (the "Closing Date"), file with the Securities and
Exchange Commission (the "Commission") and thereafter shall use its reasonable
best efforts to cause to be declared effective on or prior to 180 days after the
Closing Date, a registration statement on the appropriate form (the "Shelf
Registration Statement") covering the offer and sale of the Transfer Restricted
Securities (as defined in Section 5(e) hereof) by the Holders thereof from time
to time in accordance with the methods of distribution set forth in the Shelf
Registration Statement and Rule 415 under the Securities Act of 1933, as amended
(the "Securities Act") (hereinafter, the "Shelf Registration").
(b) The Company shall use its reasonable best efforts to keep the Shelf
Registration Statement continuously effective, in order to permit the prospectus
included therein to be lawfully delivered by the Holders of the relevant
Securities, until the earlier
<PAGE>
of such time as all the Securities covered by the Shelf Registration Statement
(i) have been sold pursuant thereto or (ii) two years following the effective
date of the Shelf Registration Statement (in any such case, such period being
called the "Shelf Registration Period"). The Company shall be deemed not to have
used its reasonable best efforts to keep the Shelf Registration Statement
effective during the requisite period if it voluntarily takes any action that
would result in Holders of Securities covered thereby not being able to offer
and sell such Securities during that period, unless (i) such action is required
by applicable law or (ii) upon the occurrence of any event contemplated by
paragraph 2(b)(v) below, such action is taken by the Company in good faith and
for valid business reasons and the Company thereafter promptly complies with the
requirements of paragraph 2(h) below if the Company has determined in good faith
that there are no material legal or commercial impediments in so doing.
(c) Notwithstanding any other provisions of this Agreement to the contrary,
the Company shall cause (other than information required to be supplied by the
selling Holders pursuant to this Agreement) (i) the Shelf Registration Statement
and the related prospectus and any amendment or supplement thereto to comply in
all material respects with the applicable requirements of the Securities Act and
the rules and regulations of the Commission thereunder, (ii) the Shelf
Registration Statement and any amendment thereto not to contain, when it becomes
effective, an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading and (iii) any prospectus forming a part of the Shelf Registration
Statement, and any amendment or supplement to such prospectus, not to contain,
as of the date of such prospectus or amendment or supplement, any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading.
(d) The Company shall, from time to time, cause a shelf registration
statement to be filed to cover additional shares of Common Stock issued in
payment of dividends, if any, as permitted in accordance with the terms of the
Preferred Stock.
2. Registration Procedures. In connection with the Shelf Registration
contemplated by Section 1 hereof the following provisions shall apply so long as
any Transfer Restricted Security exists:
(a) The Company shall (i) furnish, without charge, to the Initial
Purchasers, prior to the filing thereof with the Commission, a copy of the Shelf
Registration Statement and each amendment thereof and each amendment or
supplement, if any, to the prospectus included therein and, in the event that
the Initial Purchasers (with respect to any portion of an unsold allotment from
the original offering) are participating in the Shelf Registration Statement,
shall use its commercially reasonable best efforts to reflect in each such
document, when so filed with the Commission, such comments as such Initial
Purchasers reasonably may propose, (ii) include in each such document the names
of the Holders who propose to sell Transfer Restricted Securities pursuant to
the Shelf Registration Statement as selling security holders and (iii) file
pursuant to Rule 424(b)
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<PAGE>
under the Securities Act an amendment to the Shelf Registration Statement or
amend the prospectus to cover new Holders of Securities upon written notice by
such new Holders to the effect.
(b) The Company shall give written notice to the Initial Purchasers and the
Holders (which notice pursuant to clauses (ii) through (v) hereof shall be
accompanied by an instruction, if applicable, to suspend the use of the
prospectus until the requisite changes have been made):
(i) when the Shelf Registration Statement or any amendment thereto has
been filed with the Commission and when the Shelf Registration Statement or
any post-effective amendment thereto has become effective;
(ii) of any request by the Commission for amendments or supplements to
the Shelf Registration Statement or the prospectus included therein or for
additional information;
(iii) of the issuance by the Commission of any stop order suspending the
effectiveness of the Shelf Registration Statement or the initiation of any
proceedings for that purpose;
(iv) of the receipt by the Company or its legal counsel of any
notification with respect to the suspension of the qualification of the
Securities for sale in any jurisdiction or the initiation or threatening of
any proceeding for such purpose; and
(v) of the happening of any event that requires the Company to make
changes in the Shelf Registration Statement or the prospectus in order that
the Shelf Registration Statement or the prospectus do not contain an untrue
statement of a material fact and do not omit to state a material fact
required to be stated therein or necessary to make the statements therein
(in the case of the prospectus, in light of the circumstances under which
they were made) not misleading, which written notice need not provide any
detail as to the nature of such event.
(c) The Company shall use its reasonable best efforts to obtain the
withdrawal as soon as practicable, of any order suspending the effectiveness of
the Shelf Registration Statement.
(d) The Company shall furnish to each Holder of Transfer Restricted
Securities included within the coverage of the Shelf Registration, if the Holder
so requests in writing, without charge, one copy of the Shelf Registration
Statement and any post-effective amendment thereto, including financial
statements and schedules, and, if the Holder so requests in writing, all
exhibits thereto (other than those, if any, incorporated by reference).
(e) The Company shall, during the Shelf Registration Period, deliver to
each Holder of Transfer Restricted Securities included within the coverage of
the Shelf
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<PAGE>
Registration Statement, without charge, as many copies of the prospectus
(including each preliminary prospectus) included in the Shelf Registration
Statement and any amendment or supplement thereto as such person may reasonably
request. The Company consents, subject to the provisions of this Agreement, to
the use of the then current prospectus or any amendment thereto, together with
any supplement thereto, by each of the selling Holders in connection with the
offering and sale of the Transfer Restricted Securities covered by the
prospectus, or any amendment or supplement thereto, included in the Shelf
Registration Statement.
(f) Prior to any public offering of the Securities pursuant to the Shelf
Registration Statement, the Company shall register or qualify or cooperate with
the Holders of the Transfer Restricted Securities included therein and their
respective counsel in connection with the registration or qualification of such
Securities for offer and sale under the securities or "blue sky" laws of such
states of the United States as any such Holder reasonably requests in writing
and do any and all other acts or things necessary or advisable to enable the
offer and sale in such jurisdictions of the Securities covered by the Shelf
Registration Statement; provided, however, that the Company shall not be
required to qualify generally to do business in any jurisdiction where it is not
then otherwise required to be so qualified or take any action which would
subject it to general service of process or to taxation in any jurisdiction
where it is not then so subject.
(g) The Company shall cooperate with the Holders of the Transfer Restricted
Securities to facilitate the timely preparation and delivery of certificates
representing the Securities to be sold pursuant to the Shelf Registration
Statement free of any restrictive legends and in such denominations and
registered in such names as the Holders may reasonably request in writing at
least two Business Days prior to the closing of any sale of Registrable
Securities. For purposes of this Section 2(g), "Business Day" means any day,
other than a Saturday or Sunday, on which banks in New York are open for
business.
(h) Upon the occurrence of any event contemplated by paragraphs (ii)
through (v) of Section 2(b) above during the period for which the Company is
required to maintain an effective Shelf Registration Statement, the Company
shall use its commercially reasonable best efforts to prepare and file as
promptly as practicable a post-effective amendment to the Shelf Registration
Statement or an amendment or supplement to the related prospectus and any other
required document so that, as thereafter delivered to Holders or purchasers of
Securities, the prospectus will not contain an untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. If the Company notifies the Initial
Purchasers or the Holders, in accordance with paragraphs (ii) through (v) of
Section 2(b) above, to suspend the use of the prospectus until the requisite
changes to the prospectus have been made, then the Initial Purchasers and the
Holders shall suspend use of such prospectus.
(i) The Company will comply with all rules and regulations of the
Commission to the extent and so long as they are applicable to the Shelf
Registration and
-4-
<PAGE>
will make generally available to its security holders (or otherwise provide in
accordance with Section 11(a) of the Securities Act) an earnings statement
satisfying the provisions of Section 11(a) of the Securities Act, no later than
45 days after the end of a 12-month period (or 90 days, if such period is a
fiscal year) beginning with the first month of the Company's first fiscal
quarter commencing after the effective date of the Shelf Registration Statement,
which statement shall cover such 12-month period.
(j) The Company may require each Holder of Securities to be sold pursuant
to the Shelf Registration Statement to furnish to the Company such information
regarding the Holder and the distribution of the Securities by such Holder as
the Company may from time to time reasonably require for inclusion in the Shelf
Registration Statement, and the Company may exclude from such registration the
Securities of any Holder that fails to furnish such information.
(k) The Company shall (i) make reasonably available for inspection by the
Holders of the Transfer Restricted Securities and any attorney, accountant or
other agent retained by the Holders of the Securities all relevant financial and
other records, pertinent corporate documents and properties of the Company and
(ii) cause the Company's officers, directors, employees, accountants and
auditors to supply all relevant information reasonably requested by the Holders
of the Securities or any such attorney, accountant or agent in connection with
the Shelf Registration Statement, in each case, as shall be reasonably necessary
to enable such persons to conduct a reasonable investigation within the meaning
of Section 11 of the Securities Act; provided, however, that the foregoing
inspection and information gathering shall be coordinated on behalf of the
Holders of the Transfer Restricted Securities by one counsel (the "Designated
Counsel") designated by the Holders of a majority of the Transfer Restricted
Securities covered by the Shelf Registration Statement (provided that Holders of
Common Stock issued upon the conversion of the Preferred Stock shall be deemed
to be Holders of the aggregate number of Preferred Stock from which such Common
Stock was converted).
(l) The Company will use its reasonable best efforts to cause the Common
Stock relating to such Shelf Registration Statement to be listed on the Nasdaq
National Market or such other national securities exchange or inter-dealer
automated quotation system as the Common Stock shall be listed upon.
(m) The Company shall use its reasonable best efforts to take all other
steps necessary to effect the registration of the Transfer Restricted Securities
covered by the Shelf Registration Statement contemplated hereby.
3. Registration Expenses. The Company shall bear all fees and expenses
incurred in connection with the performance of its obligations under Sections 1
through 2 hereof, whether or not the Shelf Registration Statement is filed or
becomes effective; provided, however, that the Company shall not be required to
pay for the fees and expenses of more than one counsel to the Holders (who shall
be designated by the Holders of a majority of the Transfer Restricted Securities
covered by the Shelf Registration Statement, provided that Holders of Common
Stock issued upon the
-5-
<PAGE>
conversion of the Preferred Stock shall be deemed to be Holders of the aggregate
number of Preferred Stock from which such Common Stock was converted).
4. Indemnification and Contribution. (a) The Company shall indemnify and
hold harmless each Initial Purchaser, each Holder, each broker-dealer (a
"Participating Broker-Dealer") that holds Transfer Restricted Securities
acquired for its own account as a result of market-making activities or other
trading activities and that will be the beneficial owner (as defined in Rule
13d-3 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) of Securities, each underwriter who participates in an offering of
Transfer Restricted Securities, their respective affiliates, and each person, if
any, who controls any of such parties within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act, as follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, joint or several, as incurred, arising out of any untrue
statement or alleged untrue statement of a material fact contained in the
Shelf Registration Statement (or any amendment or supplement thereto),
covering the Securities, including all documents incorporated therein by
reference, or the omission or alleged omission therefrom of a material fact
required to be stated therein or necessary to make the statements therein
not misleading or arising out of any untrue statement or alleged untrue
statement of a material fact contained in any prospectus (or any amendment
or supplement thereto) or the omission or alleged omission therefrom of a
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and expense
whatsoever, joint or several, as incurred, to the extent of the aggregate
amount paid in settlement of any litigation, or any investigation or
proceeding by any court or governmental agency or body, commenced or
threatened, or of any claim whatsoever based upon any such untrue statement
or omission, or any such alleged untrue statement or omission; provided that
(subject to Sections 4(c) and 4(d) below) any such settlement is effected
with the prior written consent of the Company; and
(iii) against any and all expenses whatsoever, as incurred (including
reasonable fees and disbursements of one counsel (in addition to any local
counsel) chosen by the Representative, such Holder, such Participating
Broker-Dealer or any underwriter (except to the extent otherwise expressly
provided in Section 4(c) hereof)), reasonably incurred in investigating,
preparing or defending against any litigation, or any investigation or
proceeding by any court or governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue statement or
omission, or any such alleged untrue statement or omission, to the extent
that any such expense is not paid under subparagraph (i) or (ii) of this
Section 4(a);
-6-
<PAGE>
provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent (i) arising out of an untrue
statement or omission or alleged untrue statement or omission (A) made in or
omitted from a preliminary prospectus or registration statement and corrected or
included in a subsequent prospectus or registration statement or any amendment
or supplement thereto made in reliance upon and in conformity with written
information furnished to the Company by or on behalf of such Initial Purchaser,
such Holder, such Participating Broker-Dealer or any underwriter with respect to
such Initial Purchaser, Holder, Participating Broker-Dealer or underwriter, as
the case may be, expressly for use in the Shelf Registration Statement (or any
amendment or supplement thereto) or any prospectus (or any amendment or
supplement thereto) or (B) resulting from the use of a prospectus during a
period when the use thereof has been suspended in accordance with Section
2(b)(v) and Section 5(c), provided, in each case, that such Initial Purchaser,
Holders, Participating Broker- Dealers or any underwriter with respect thereto
received prior notice of such suspension.
(b) Each Holder agrees, severally and not jointly, to indemnify and hold
harmless the Company, each Initial Purchaser, each underwriter who participates
in an offering of Transfer Restricted Securities and the other selling Holders
and each of their respective directors and each person, if any, who controls any
of the Company, any Initial Purchaser, any underwriter or any other selling
Holder within the meaning of Section 15 of the Act or Section 20 of the Exchange
Act, against any and all loss, liability, claim, damage and expense whatsoever
described in the indemnity contained in Section 4(a) hereof, as incurred, but
only with respect to untrue statements or omissions, or alleged untrue
statements or omissions, made in the Shelf Registration Statement (or any
amendment or supplement thereto) or any prospectus (or any amendment or
supplement thereto) in reliance upon and in conformity with written information
furnished to the Company by or on behalf of such selling Holder with respect to
such Holder expressly for use in the Shelf Registration Statement (or any
supplement thereto), or any such prospectus (or any amendment thereto);
provided, however, that no such Holder shall be liable for any claims hereunder
in excess of the amount of net proceeds received by such Holder from the sale of
Transfer Restricted Securities pursuant to the Shelf Registration Statement.
(c) Each indemnified party shall give notice as promptly as reasonably
practicable to each indemnifying party of any action commenced against it in
respect of which indemnity may be sought hereunder, but failure to so notify an
indemnifying party shall not relieve such indemnifying party from any liability
hereunder to the extent it is not materially prejudiced as a result thereof and
in any event shall not relieve it from any liability that it may have otherwise
than on account of this indemnity agreement. An indemnifying party may
participate at its own expense in the defense of any such action; provided,
however, that counsel to the indemnifying party shall not (except with the
consent of the indemnified party) also be counsel to the indemnified party.
Notwithstanding the foregoing, if it so elects within a reasonable time after
receipt of such notice, an indemnifying party, jointly with any other
indemnifying parties receiving such notice, may assume the defense of such
action with counsel chosen by it and approved by the indemnified parties
defendant in such action (which approval shall not
-7-
<PAGE>
be unreasonably withheld), unless such indemnified parties reasonably object to
such assumption on the ground that there may be legal defenses available to them
which are different from or in addition to those available to such indemnifying
party. If an indemnifying party assumes the defense of such action, the
indemnifying parties shall not be liable for any fees and expenses of counsel
for the indemnified parties incurred thereafter in connection with such action.
In no event shall the indemnifying parties be liable for fees and expenses of
more than one counsel (in addition to any local counsel) separate from their own
counsel for all indemnified parties in connection with any one action or
separate but similar or related actions arising out of the same general
allegations or circumstances. No indemnifying party shall, without the prior
written consent of the indemnified parties, settle or compromise or consent to
the entry of any judgment with respect to any litigation, or any investigation
or proceeding by any governmental agency or body, commenced or threatened, or
any claim whatsoever in respect of which indemnification or contribution could
be sought under this Section 4 (whether or not the indemnified parties are
actual or potential parties thereto), unless such settlement, compromise or
consent (i) includes a full and unconditional release of each indemnified party
from all liability arising out of such litigation, investigation, proceeding or
claim and the offer and sale of any Securities and (ii) does not include a
statement as to or an admission of fault, culpability or a failure to act by or
on behalf of any indemnified party.
(d) If at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for reasonable fees and
expenses of counsel pursuant to Section 4(a)(iii) above, then such indemnifying
party agrees that it shall be liable for any settlement of the nature
contemplated by Section 4(a)(ii) effected without its written consent if (i)
such settlement is entered into more than 60 days after receipt by such
indemnifying party of the aforesaid request, (ii) such indemnifying party shall
have received notice of the terms of such settlement at least 30 days prior to
such settlement being entered into and (iii) such indemnifying party shall not
have reimbursed such indemnified party in accordance with such request prior to
the date of such settlement.
(e) In order to provide for just and equitable contribution in circumstances
under which any of the indemnity provisions set forth in this Section 4 is for
any reason held to be unavailable to the indemnified parties although applicable
in accordance with its terms, the Company, the Initial Purchasers and the
Holders, as applicable, shall contribute to the aggregate losses, liabilities,
claims, damages and expenses of the nature contemplated by such indemnity
agreement incurred by the Company, the Initial Purchasers and the Holders;
provided, however, that no person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person that was not guilty of such fraudulent
misrepresentation. As between the Company and the Initial Purchasers and the
Holders, such parties shall contribute to such aggregate losses, liabilities,
claims, damages and expenses of the nature contemplated by such indemnity
agreement in such proportion as shall be appropriate to reflect the relative
fault of the Company on the one hand and of the Holder of Transfer Restricted
Securities, the Participating Broker-Dealer or Initial Purchaser, as the case
may be, on the other hand in connection with the statements or omissions which
resulted in such losses, liabilities, claims, damages or expenses, as well as
-8-
<PAGE>
any other relevant equitable considerations.
The relative fault of the Company on the one hand and the Holder of
Transfer Restricted Securities, the Participating Broker-Dealer or the Initial
Purchasers, as the case may be, on the other hand shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company, or by the Holder of Transfer
Restricted Securities, the Participating Broker-Dealer or the Initial
Purchasers, as the case may be, and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission.
The Company and the Holders of the Transfer Restricted Securities and the
Initial Purchasers agree that it would not be just and equitable if contribution
pursuant to this Section 4 were determined by pro rata allocation or by any
other method of allocation which does not take account of the equitable
considerations referred to above in this Section 4.
For purposes of this Section 4, each affiliate of any person, if any, who
controls a Holder of Transfer Restricted Securities, an Initial Purchaser or a
Participating Broker-Dealer within the meaning of Section 15 of the Securities
Act or Section 20 of the Exchange Act shall have the same rights to contribution
as such other person, and each director of the Company, each affiliate of the
Company, each executive officer of the Company who signed the Shelf Registration
Statement, and each person, if any, who controls the Company within the meaning
of Section 15 of the Securities Act or Section 20 of the Exchange Act shall have
the same rights to contribution as the Company.
(f) The agreements contained in this Section 4 shall survive the sale of
the Securities pursuant to the Shelf Registration Statement and shall remain in
full force and effect, regardless of any termination or cancellation of this
Agreement or any investigation made by or on behalf of any indemnified party.
5. Additional Dividends Under Certain Circumstances. (a) Additional
dividends (the "Additional Dividends") shall accrue with respect to the shares
of Preferred Stock which are Transfer Restricted Securities upon the occurrence
of any of the following events (each such event in clauses (i), (ii) and (iii)
below being herein called a "Registration Default"):
(i) if by 90 days after the Closing Date, the Shelf Registration
Statement has not been filed with the Commission;
(ii) if by 180 days after the Closing Date, the Shelf Registration
Statement has not been declared effective by the Commission; or
(iii) if after the Shelf Registration Statement is declared effective
(A) the Shelf Registration Statement thereafter ceases to be effective; or
(B) the Shelf Registration Statement or the related prospectus ceases to be
usable (in each case except as permitted in paragraph (c) below) in
connection with resales of Transfer
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<PAGE>
Restricted Securities in accordance with and during the periods specified
herein because either (1) any event occurs as a result of which the related
prospectus forming part of such Shelf Registration Statement would include
any untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein in the light of the circumstances
under which they were made not misleading, or (2) it shall be necessary to
amend such Shelf Registration Statement or supplement the related
prospectus, to comply with the Securities Act or the Exchange Act or the
respective rules thereunder.
(b) Additional Dividends shall accrue with respect to the shares of
Preferred Stock which are Transferred Restricted Securities from and including
the date on which any such Registration Default shall occur until all such
Registration Defaults have been cured according to the following:
(i) with respect to the first 90-day period following the occurrence
of such Registration Default, at a rate of 0.50% per year per share of
Preferred Stock; and
(ii) with respect to any period beyond 90 days following the occurrence
of such Registration Default, at a rate of an additional 0.25% per year per
share of Preferred Stock; provided, that the maximum Additional Dividend
rate shall not exceed 1.00% per year.
The amount of Additional Dividends for each share of Preferred Stock shall
be determined by multiplying the applicable Additional Dividends, specified
above, by a fraction, the numerator of which is the number of days such
Additional Dividends rate was applicable during such period (determined on the
basis of a 360-day year comprised of twelve 30-day months), and the denominator
of which is 360; and
(iii) if after the cure of all Registration Defaults then in effect,
there is a subsequent Registration Default, the rate of Additional Dividends
will initially be 0.25%, regardless of the rate of Additional Dividends in
effect at the time of the cure of the Registration Defaults.
(c) A Registration Default referred to in Section 5(a)(iii) shall be deemed
not to have occurred and be continuing in relation to the Shelf Registration
Statement or the related prospectus if (i) such Registration Default has
occurred solely as a result of one of the following, each of which is referred
to herein as a "Permitted Interruption": (x) the filing of a post-effective
amendment to the Shelf Registration Statement to incorporate annual audited
financial information with respect to the Company where such post-effective
amendment is not yet effective and needs to be declared effective to permit
Holders to use the related prospectus or (y) material business developments with
respect to the Company that would need to be described in the Shelf Registration
Statement or the related prospectus to make such Shelf Registration Statement or
related prospectus accurate and complete and (ii) in the case of clause (y), the
Company proceeds promptly and in good faith to amend or supplement the Shelf
Registration Statement and related
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<PAGE>
prospectus to describe such events if the Company has determined in good faith
that there are no material legal or commercial impediments in so doing;
provided, however, that a Permitted Interruption shall expire and will not
prevent a Registration Default from occurring or continuing to the extent it
exceeds 90 days for a single period. Multiple Permitted Interruptions shall not
exceed 90 days in the aggregate in any consecutive 365- day period. Additional
Dividends shall accrue in accordance with the subsection (b) from the date that
such Permitted Interruption expires until such Registration Default is cured.
(d) Additional Dividends shall cease to accumulate and the dividend rate on
the Preferred Stock shall revert to the dividend rate originally borne on the
Preferred Stock upon the cure of all Registration Defaults.
(e) Any amounts of Additional Dividends due pursuant to this Section 5 will
be payable in cash and on such terms and conditions as provided in the
Certificate of Designations with respect to the Preferred Stock. Notwithstanding
anything to the contrary contained in this Section 5, the Company will not be
required to pay Additional Dividends with respect to more than one Registration
Default during any single period.
(f) "Transfer Restricted Securities" means each Security until the earlier
of (i) the date on which such Security has been effectively registered under the
Securities Act and disposed of in accordance with the Shelf Registration
Statement or (ii) the date on which is two years from the effective date of
the Shelf Registration Statement.
6. Miscellaneous.
(a) Rule 144 and Rule 144A. So long as any Transfer Restricted Security
exists, the Company shall use its reasonable best efforts to file the reports
required to be filed by it under the Securities Act and the Exchange Act in a
timely manner and, if at any time the Company is not required to file such
reports, it will, upon the request of any Holder of Transfer Restricted
Securities, make publicly available other information so long as necessary to
permit sales of its securities pursuant to Rules 144 and 144A. The Company
covenants that, if in the event the Company is no longer subject to Sections 13
or 15(d) of the Exchange Act, it will take such further action as any Holder of
Transfer Restricted Securities may reasonably request, all to the extent
required from time to time to enable such Holder to sell Transfer Restricted
Securities without registration under the Securities Act within the limitation
of the exemptions provided by Rules 144 and 144A (including the requirements of
Rule 144A(d)(4)). The Company will provide a copy of this Agreement to
prospective purchasers of Securities identified to the Company by the Initial
Purchasers upon request.
Notwithstanding the foregoing, nothing in this Section 6 shall be deemed to
require the Company to register any of its securities pursuant to the Exchange
Act.
(b) No Inconsistent Agreements. The rights granted to the Holders hereunder
do not, and will not for the term of this Agreement in any way conflict with and
are not, and will not during the term of this Agreement be inconsistent with the
rights granted to
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the holders of the Company's other issued and outstanding securities under any
other agreements entered into by the Company.
(c) Amendments and Waivers. The provisions of this Agreement may not be
amended, modified or supplemented, and waivers or consents to departures from
the provisions hereof may not be given, otherwise than with the prior written
consent of the Company and the Holders of a majority of the Transfer Restricted
Securities (provided that Holders of Common Stock issued upon conversion of
Preferred Stock shall be deemed to be Holders of the aggregate number of
Preferred Stock from which such Common Stock was converted) affected by such
amendment, modification, supplement, waiver or consents.
(d) Notices. All notices and other communications provided for or permitted
hereunder shall be made in writing by hand-delivery, registered first-class
mail, telex, telecopier, or any courier guaranteeing overnight delivery (i) if
to a Holder, at the most current address given by such Holder to the Company by
means of a notice given in accordance with the provisions of this Section 6(d),
which address initially is, with respect to the Initial Purchasers, the address
set forth in the Purchase Agreement; and (ii) if to the Company, initially at
the Company's address set forth in the Purchase Agreement and thereafter at such
other address, notice of which is given in accordance with the provisions of
this Section 6(d).
All such notices and communications shall be deemed to have been duly given:
at the time delivered by hand, if personally delivered; five business days after
being deposited in the mail, postage prepaid, if mailed; when answered back, if
telexed; when receipt is acknowledged, if telecopied; and on the next business
day, if timely delivered to an air courier guaranteeing overnight delivery.
(e) Successors and Assigns. This Agreement shall inure to the benefit of
and be binding upon the successors, assigns and transferees of the Initial
Purchasers, including, without limitation and without the need for an express
assignment, subsequent Holders; provided, however, that nothing herein shall be
deemed to permit any assignment, transfer or other disposition of Transfer
Restricted Securities in violation of the terms of the Purchase Agreement. If
any transferee of any Holder shall acquire Transfer Restricted Securities, in
any manner, whether by operation of law or otherwise, such Transfer Restricted
Securities shall be held subject to all of the terms of this Agreement, and by
taking and holding such Transfer Restricted Securities, such person shall be
conclusively deemed to have agreed to be bound by and to perform all of the
terms and provisions of this Agreement and such person shall be entitled to
receive the benefits hereof.
(f) Third Party Beneficiary. Each of the Initial Purchasers and each Holder
shall be a third party beneficiary of the agreements made hereunder between the
Company, on the one hand, and the Initial Purchasers, on the other hand, and
shall have the right to enforce such agreements directly to the extent it deems
such enforcement necessary or advisable to protect its rights or the rights of
Holders hereunder.
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<PAGE>
(g) Counterparts. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(h) Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(i) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO ANY
PROVISIONS RELATING TO CONFLICTS OF LAWS. Specified times of day refer to New
York City time.
(j) Severability. In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstance, is held
invalid, illegal or unenforceable, the validity, legality and enforceability of
any such provision in every other respect and of the remaining provisions
contained herein shall not be affected or impaired thereby.
(k) Securities Held by the Company or Any of Its Affiliates. Whenever the
consent or approval of Holders of a specified percentage of Transfer Restricted
Securities is required hereunder, Securities held by the Company or any of its
affiliates (as such term is defined in Rule 405 under the Securities Act) shall
not be counted in determining whether such consent or approval was given by the
Holders of such required percentage.
[Signature Page Follows]
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Registration Rights
Agreement as of the date first written above.
RHYTHMS NETCONNECTIONS INC.
By:
----------------------------------
Name:
Title:
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
SALOMON SMITH BARNEY INC.
By: Merrill Lynch, Pierce, Fenner & Smith
Incorporated
By:
--------------------------------
Authorized Signatory
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<PAGE>
Exhibit 4.21
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (the "Agreement"), is made as of the
March 16, 2000, by and among Rhythms NetConnections Inc., a Delaware corporation
(the "Company"), and the entities listed on Schedule I to this Agreement.
WHEREAS, the Company and HMTF Bridge RHY, LLC entered into a Preferred
Stock and Warrant Purchase Agreement dated as of February 6, 2000 (the "Stock
Purchase Agreement");
WHEREAS, pursuant to an Assignment and Assumption, the Holders (as defined
below) have become parties to the Stock Purchase Agreement;
WHEREAS, it is a condition precedent to the closing of the transactions
contemplated in the Stock Purchase Agreement that the parties hereto execute and
deliver this Agreement;
NOW THEREFORE, in consideration of the premises, mutual promises and
covenants contained in this Agreement and intending to be legally bound, the
parties hereto hereby agree as follows:
ARTICLE I
Definitions
-----------
SECTION 1.01. Definitions. Terms defined in the Stock Purchase Agreement are
used herein as therein defined. In addition, the following terms, as used
herein, have the following meanings:
"Commission" means the Securities and Exchange Commission.
"Demand Registration" means a registration under the Securities Act
requested in accordance with Section 2.01.
"Holders" means the entities set forth on Schedule I (including any
affiliates thereof) and any direct or indirect transferee of any Registrable
Securities held by such entities.
"Investor Rights Agreement" means the Amended and Restated Investors'
Rights Agreement dated as of April 6, 1999 among the Company and certain
investors parties thereto.
"Investor Rights Agreement 30% Right" means the rights to participate in a
Company registration pursuant to Section 1.8 of the Investor Rights Agreement,
pursuant to which the amount of securities of the selling holders under such
agreement to be included in a piggyback registration shall not, except in
certain circumstances, be reduced below thirty percent (30%) of the total amount
of securities included in such offering.
"Piggyback Registration" has the meaning set forth in Section 2.02.
"Registrable Common Stock" means the shares of Common Stock issued upon
conversion of the Registrable Series E Preferred Stock or upon exercise of the
Warrants, plus any
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additional shares of Common Stock issued in respect thereof in connection with
any stock split, stock dividend or similar event with respect to the Common
Stock.
"Registrable Series E Preferred Stock" means the Series E Preferred Stock
purchased pursuant to the Stock Purchase Agreement, plus any additional shares
of Series E Preferred Stock issued in respect thereof in connection with any
stock split, stock dividend or similar event with respect to the Series E
Preferred Stock.
"Registrable Securities" means (a) the Registrable Series E Preferred Stock,
(b) the Registrable Common Stock and (c) any securities of the Company or any
successor entity into which Registrable Common Stock or Registrable Series E
Preferred Stock may hereafter be converted or changed. As to any particular
Registrable Securities, such securities shall cease to be Registrable Securities
when (i) a registration statement with respect to the sale of such securities
shall have become effective under the Securities Act and such securities shall
have been disposed of under such registration statement, (ii) such securities
shall have been transferred pursuant to Rule 144, (iii) such securities shall
have been otherwise transferred or disposed of, and new certificates therefor
not bearing a legend restricting further transfer shall have been delivered by
the Company, and subsequent transfer or disposition of them shall not require
their registration or qualification under the Securities Act or any similar
state law then in force or (iv) such securities shall have ceased to be
outstanding.
"Requesting Holders" means the Holders requesting a Demand Registration,
and shall include parties deemed "Requesting Holders" pursuant to Section
2.01(a)(iii).
"Rule 144" means Rule 144 (or any successor rule of similar effect)
promulgated under the Securities Act.
"Selling Holder" means any Holder who is selling Registrable Securities
pursuant to a public offering registered hereunder.
"Senior Piggyback Registration Rights" means those piggyback registration
rights pursuant to (i) the Warrant Registration Rights Agreement dated as of May
5, 1998 among the Company and parties thereto, (ii) the Warrant to Purchase
Shares of Common Stock granted to Sun Financial Group dated as of May 19, 1998,
(iii) the Warrant to Purchase Shares of Common Stock granted to GATX dated as of
March 31, 1999 and (iv) the Stock Subscription Warrant granted to Cisco Systems
Capital Corporation dated as of April 5, 1999.
"Shelf Registration" has the meaning set forth in Section 2.03(b).
"Underwriter" means a securities dealer who purchases any Registrable
Securities as principal and not as part of such dealer's market-making
activities.
SECTION 1.02. Internal References. Unless the context indicates otherwise,
references to Articles, Sections and paragraphs shall refer to the corresponding
articles, sections and paragraphs in this Agreement, and references to the
parties shall mean the parties to the Stock Purchase Agreement.
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ARTICLE II
Registration Rights
-------------------
SECTION 2.01. Demand Registration. (a) (i) Holders of a majority of the
Registrable Securities held by the Holders may make up to four (4) written
requests for a Demand Registration under this Section 2.01 of all or any part of
the Registrable Securities held by such Holders; provided, that (A) each such
Demand Registration by the Holders must be in respect of Registrable Securities
with a fair market value of at least $50,000,000, (B) the Holders shall not be
entitled to a Demand Registration if, during the 120 days preceding such
request, the Holders had requested a Demand Registration and (C) unless and
until the consent described in Section 5.10 is obtained, the Holders shall not
be entitled to a Demand Registration which results in such registration
statement being declared effective within 120 days after the effective date of
any registration effected pursuant to Section 1.2 of the Investors Rights
Agreement.
(ii) Any request for a Demand Registration will specify the aggregate
number of shares of Registrable Securities proposed to be sold by the Requesting
Holders and will also specify the intended method of disposition thereof. A
registration will not count as a Demand Registration until it has become
effective. Should a Demand Registration not become effective due to the failure
of a Holder to perform its obligations under this Agreement or the inability of
the Requesting Holders to reach agreement with the Underwriters for the proposed
sale on price or other customary terms for such transaction, or in the event the
Requesting Holders withdraw or do not pursue the request for the Demand
Registration (in each of the foregoing cases, provided that at such time the
Company is in compliance in all material respects with its obligations under
this Agreement), then, subject to Section 2.01(b), such Demand Registration
shall be deemed to have been effected (provided that (i) if, the Demand
Registration does not become effective because a material adverse change has
occurred, or is reasonably likely to occur, in the condition (financial or
otherwise), business, assets or results of operations of the Company and its
subsidiaries taken as a whole subsequent to the date of the written request made
by the Requesting Holders, (ii) if the Company withdraws the Demand Registration
for any reason or (iii) if, after the Demand Registration has become effective,
an offering of Registrable Securities pursuant to a registration is interfered
with by any stop order, injunction, or other order or requirement of the
Commission or other governmental agency or court then the Demand Registration
shall not be deemed to have been effected and will not count as a Demand
Registration).
(iii) Upon receipt of any request for a Demand Registration by holders
of a majority of the Registrable Securities, the Company shall promptly (but in
any event within ten (10) days) give written notice of such proposed Demand
Registration to all other Holders, and all such Holders shall have the right,
exercisable by written notice to the Company within twenty (20) days of their
receipt of the Company's notice, to elect to include in such Demand Registration
such portion of their Registrable Securities as they may request. All such
Holders requesting to have their Registrable Securities included in a Demand
Registration in accordance with the preceding sentence shall be deemed to be
"Requesting Holders" for purposes of this Section 2.01.
(b) In the event that the Requesting Holders withdraw or do not pursue a
request for a Demand Registration and, pursuant to Section 2.01(a) hereof, such
Demand Registration is
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deemed to have been effected, the Holders may reacquire such Demand Registration
(such that the withdrawal or failure to pursue a request will not count as a
Demand Registration hereunder) if the Selling Holders reimburse the Company for
any and all Registration Expenses incurred by the Company in connection with
such request for a Demand Registration.
(c) If the Requesting Holders so elect, the offering of such Registrable
Securities pursuant to such Demand Registration shall be in the form of a "firm
commitment" underwritten offering. A majority in interest of the Requesting
Holders shall have the right to select the managing Underwriters and any
additional investment bankers and managers to be used in connection with any
offering under this Section 2.01, subject to the Company's approval, which
approval shall not be unreasonably withheld.
(d) The Requesting Holders will inform the Company of the time and manner
of any disposition of Registrable Common Stock, and agree to reasonably
cooperate with the Company in effecting the disposition of the Registrable
Common Stock in a manner that does not unreasonably disrupt the public trading
market for the Common Stock; provided, however, that the Holders' only right to
a shelf registration statement shall be pursuant to Section 2.03.
(e) Subject to the Investor Rights Agreement 30% Right, no securities to be
sold for the account of any Person (including the Company) other than a
Requesting Holder shall be included in a Demand Registration unless the managing
Underwriter or Underwriters shall advise the Company and the Requesting Holders
in writing that the inclusion of such securities will not materially and
adversely affect the price of the offering (a "Material Adverse Effect").
Furthermore, in the event the managing Underwriter or Underwriters shall advise
the Company or the Requesting Holders that even after exclusion of all
securities of other Persons (including the Company) pursuant to the immediately
preceding sentence, the amount of Registrable Securities proposed to be included
in such Demand Registration by Requesting Holders is sufficiently large to cause
a Material Adverse Effect, the Registrable Securities of the Requesting Holders
to be included in such Demand Registration shall equal the number of shares
which the Company and the Requesting Holders are so advised can be sold in such
offering without a Material Adverse Effect and such shares shall be allocated
pro rata among the Requesting Holders on the basis of the number of Registrable
Securities requested to be included in such registration by each such Requesting
Holder; provided, however, that if any Registrable Securities requested to be
registered pursuant to a Demand Registration under Section 2.01 are excluded
from registration hereunder, then the Holder(s) having shares excluded
("Excluded Holders") shall have the right to withdraw all, or any part, of their
shares from such registration.
SECTION 2.02. Piggyback Registration. (a) If the Company proposes to file a
registration statement under the Securities Act with respect to an offering of
Common Stock for its own account or for the account of another Person (other
than a registration statement on Form S-4 or S-8, or, except as provided for in
Section 2.03, pursuant to Rule 415 (or any substitute form or rule,
respectively, that may be adopted by the Commission)), the Company shall give
written notice of such proposed filing to the Holders at the address set forth
in the share register of the Company as soon as reasonably practicable (but in
no event less than 15 days before the anticipated filing date), undertaking to
provide each Holder the opportunity to register on the same terms and conditions
such number of shares of Registrable Common Stock as such Holder may request (a
"Piggyback Registration"). Each Holder will have seven business days after
receipt of any such notice to notify the Company as to whether it wishes to
participate in a
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<PAGE>
Piggyback Registration (which notice shall not be deemed to be a request for a
Demand Registration); provided that should a Holder fail to provide timely
notice to the Company, such Holder will forfeit any rights to participate in the
Piggyback Registration with respect to such proposed offering. In the event that
the registration statement is filed on behalf of a Person other than the
Company, the Company will use its best efforts to have the shares of Registrable
Common Stock that the Holders wish to sell included in the registration
statement. If the Company or the Person for whose account such offering is being
made shall determine in its sole discretion not to register or to delay the
proposed offering, the Company may, at its election, provide written notice of
such determination to the Holders and (i) in the case of a determination not to
effect the proposed offering, shall thereupon be relieved of the obligation to
register such Registrable Common Stock in connection therewith, and (ii) in the
case of a determination to delay a proposed offering, shall thereupon be
permitted to delay registering such Registrable Common Stock for the same period
as the delay in respect of the proposed offering. As between the Company and the
Selling Holders, the Company shall be entitled to select the Underwriters in
connection with any Piggyback Registration.
(b) If the Registrable Securities requested to be included in the Piggyback
Registration by any Holder differ from the type of securities proposed to be
registered by the Company and the managing Underwriter advises the Company that
due to such differences the inclusion of such Registrable Securities would cause
a Material Adverse Effect, then (i) the number of such Holders' Registrable
Securities to be included in the Piggyback Registration shall be reduced to an
amount which, in the opinion of the managing Underwriter, would eliminate such
Material Adverse Effect or (ii) if no such reduction would, in the opinion of
the managing Underwriter, eliminate such Material Adverse Effect, then the
Company shall have the right to exclude all such Registrable Securities from
such Piggyback Registration, provided, that no other securities of such type are
included and offered for the account of any other Person in such Piggyback
Registration. Any partial reduction in number of Registrable Securities of any
Holder to be included in the Piggyback Registration pursuant to clause (i) of
the immediately preceding sentence shall be effected pro rata based on the ratio
which such Holder's requested shares bears to the total number of shares
requested to be included in such Piggyback Registration by all Persons other
than the Company who have the contractual right to request that their shares be
included in such registration statement and who have requested that their shares
be included, subject to the Senior Piggyback Registration Rights and (if
applicable) the Investor Rights Agreement 30% Right. If the Registrable
Securities requested to be included in the registration statement are of the
same type as the securities being registered by the Company and the managing
Underwriter advises the Company that the inclusion of such Registrable
Securities would cause a Material Adverse Effect, the Company will be obligated
to include in such registration statement, as to each Holder only a portion of
the shares such Holder has requested be registered equal to the ratio which such
Holder's requested shares bears to the total number of shares requested to be
included in such registration statement by all Persons (other than the Person or
Persons initiating such registration request) who have the contractual right to
request that their shares be included in such registration statement and who
have requested their shares be included, subject to the Senior Piggyback
Registration Rights and the (if applicable) Investor Rights Agreement 30% Right.
If the Company initiated the registration, then the Company may include all of
its securities in such registration statement before any such Holder's requested
shares are included. If another security holder initiated the registration, then
the Company may not include any of its securities in such registration statement
unless all Registrable Securities requested to be included in the registration
statement by all Holders are included in such
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registration statement. If as a result of the provisions of this Section 2.02(b)
any Holder shall not be entitled to include all Registrable Securities in a
registration that such Holder has requested to be so included, such Holder may
withdraw such Holder's request to include Registrable Securities in such
registration statement prior to its effectiveness.
SECTION 2.03. Shelf Registration. (a) Holders of a majority of the
Registrable Securities may, at any time after the first anniversary of the
Closing Date (the "First Anniversary"), make a written request that the Company
effect a shelf registration of a portion of the Registrable Securities held by
such Holders (the "Shelf Registration") pursuant to Rule 415; provided, that a
Holder will be entitled to include in the Shelf Registration no more than 25% of
the Registrable Securities held by such Holder immediately after the Closing
Date (giving effect to accretion of dividends as of such anniversary on such
holder's Registrable Series E Preferred Stock and exercise, as of or prior to
such anniversary, of such holder's Warrants). Upon receipt of a request for the
Shelf Registration, the Company shall promptly (but in any event within 10 days)
give written notice of the proposed Shelf Registration to all other Holders, and
each such other Holder shall have the right to include in the Shelf Registration
up to 25% of the Registrable Securities held by such Holder immediately after
the Closing Date (giving effect to accretion of dividends as of such anniversary
on such holder's Registrable Series E Preferred Stock and exercise, as of or
prior to such anniversary, of such holder's Warrants).
(b) From and after the third anniversary of the Closing Date, Holders of a
majority of the Registrable Securities may make a written request that the
Company amend the Shelf Registration to include in the Shelf Registration no
more than 50% of the Registrable Securities held by such Holders immediately
after the Closing Date (giving effect to accretion of dividends as of such
anniversary on such holder's Registrable Series E Preferred Stock and exercise,
as of or prior to such anniversary, of such holder's Warrants). Upon receipt of
such request, the Company shall promptly (but in any event within 10 days) give
written notice of the proposed amendment to all other Holders, and each such
other Holder shall have the right to include in the amended Shelf Registration
up to 50% of the Registrable Securities held by such Holder immediately after
the Closing Date (giving effect to accretion of dividends as of such anniversary
on such holder's Registrable Series E Preferred Stock and exercise, as of or
prior to such anniversary, of such holder's Warrants). From and after the fourth
anniversary of the Closing Date, Holders of a majority of the Registrable
Securities may make a written request that the Company amend the Shelf
Registration to include in the Shelf Registration no more than 75% of the
Registrable Securities held by such Holder immediately after the Closing Date
(giving effect to accretion of dividends as of such anniversary on such holder's
Registrable Series E Preferred Stock and exercise, as of or prior to such
anniversary, of such holder's Warrants). Upon receipt of such request, the
Company shall promptly (but in any event within 10 days) give written notice of
the proposed amendment to all other Holders, and each such other Holder shall
have the right to include in the amended Shelf Registration up to 75% of the
Registrable Securities held by such Holders immediately after the Closing Date
(giving effect to accretion of dividends as of such anniversary on such Holder's
Registrable Series E Preferred Stock and exercise, as of or prior to such
anniversary, of such Holder's Warrants). From and after the fifth anniversary of
the Closing Date, Holders of a majority of the Registrable Securities may make a
written request that the Company amend the Shelf Registration to include in the
Shelf Registration up to 100% of the Registrable Securities held by such Holders
immediately after the Closing Date (giving effect to accretion of dividends as
of such anniversary on such holder's Registrable Series E Preferred Stock and
exercise, as of or prior to such anniversary, of
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such holder's Warrants). Upon receipt of such request, the Company shall
promptly (but in any event within 10 days) give written notice of the proposed
amendment to all other Holders, and each such other Holder shall have the right
to include in the amended Shelf Registration up to 100% of the Registrable
Securities held by such Holder immediately after the Closing Date (giving effect
to accretion of dividends as of such anniversary on such holder's Registrable
Series E Preferred Stock and exercise, as of or prior to such anniversary, of
such holder's Warrants). If a Nonconsent Event (as defined in Section 5.10)
shall have occurred, references in this paragraph to the "third anniversary of
the Closing Date" shall mean the second anniversary of the Closing Date,
references to the "fourth anniversary of the Closing Date" shall mean the third
anniversary of the Closing Date and references to the "fifth anniversary of the
Closing Date" shall mean the fourth anniversary of the Closing Date.
(c) If the Company's ability to amend the registration statement for the
Shelf Registration to increase the number of Registrable Securities included
therein (or to file a new shelf registration statement in respect thereof) in
accordance with Section 2.03 (b) is subject to any contractual limitations that
could delay the Company's ability to file or cause to become effective such
registration statement, then, if requested by Holders of a majority of the
Registrable Securities, the Company shall, in lieu of following the procedure
set forth in Section 2.03(b), file a single registration statement for the Shelf
Registration (and cause such registration statement to become and remain
effective for the period set forth in Section 3.01) that would permit the
offering of such portion of the Registrable Securities (up to 100%) as may be
requested by the Holders of a majority of the Registrable Securities (it being
understood and agreed that the Holders of the Registrable Securities would not
have the right to offer and sell from such Shelf Registration Registrable
Securities other than in accordance with the schedule and amounts set forth in
Section 2.03(b) and that the Company would have the right to take whatever
measures necessary to ensure that such schedule was followed, including, without
limitation the issuance of stop orders).
ARTICLE III
Registration Procedures
-----------------------
SECTION 3.01. Filings; Information. In connection with the registration of
Registrable Securities pursuant to Section 2.01, Section 2.02 and Section 2.03
hereof, the Company will use its reasonable best efforts to effect the
registration of such Registrable Securities as promptly as is reasonably
practicable, and in connection with any such request:
(a) The Company will expeditiously prepare and file with the Commission a
registration statement on any form for which the Company then qualifies and
which counsel for the Company shall deem appropriate and available for the sale
of the Registrable Securities to be registered thereunder in accordance with the
intended method of distribution thereof, and use its reasonable best efforts to
cause such filed registration statement to become and remain effective (i) with
respect to any Demand Registration or Piggyback Registration, for such period,
not to exceed 60 days, as may be reasonably necessary to effect the sale of such
securities, (ii) with respect to the Shelf Registration, until the earlier of
the sale of all Registrable Securities thereunder and the eighth anniversary of
the Closing Date (it being understood that if at any time
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all the Registrable Securities then permitted to be sold under such Shelf
Registration pursuant to Section 2.03 have been sold but the Holders have the
right to request the addition of additional Registrable Securities to the Shelf
Registration in the future pursuant to Section 2.03, the Company may (at its
option) either cause the registration statement to remain effective
(notwithstanding the fact that all securities then registrable on such shelf
registration statement shall have been sold) and to file post-effective
amendments when required to permit the sale of the additional Registrable
Securities or prepare and file, and cause to become and remain effective, a new
shelf registration statement to effect the registration of the additional
Registrable Securities when required pursuant to Section 2.03); provided that if
the Company shall furnish to the Selling Holder a certificate signed by the
Company's Chairman, President or any Vice-President stating that the Company's
Board of Directors has determined in good faith that it would be detrimental or
otherwise disadvantageous to the Company or its shareholders for such a
registration statement to be filed as expeditiously as possible because the sale
of Registrable Securities covered by such Registration Statement or the
disclosure of information in any related prospectus or prospectus supplement
would materially interfere with any acquisition, financing or other material
event or transaction which is then intended or the public disclosure of which at
the time would be materially prejudicial to the Company, the Company may
postpone the filing or effectiveness of a registration statement for a period of
not more than 120 days; provided that during any 360-day period the Company
shall use its reasonable best efforts to permit a period of at least 120
consecutive days during which the Company will make a registration statement
available under this Agreement; and provided further that if (i) the effective
date of any registration statement filed pursuant to a Demand Registration would
otherwise be at least 45 calendar days, but fewer than 90 calendar days, after
the end of the Company's fiscal year, and (ii) the Securities Act requires the
Company to include audited financials as of the end of such fiscal year, the
Company may delay the effectiveness of such registration statement for such
period as is reasonably necessary to include therein its audited financial
statements for such fiscal year. If the Company exercises its right to postpone
the filing or effectiveness of a registration statement, the applicable
Requesting Holders shall be entitled to withdraw their request for such Demand
Registration and it shall not count as a Demand Registration.
(b) Anything in this Agreement to the contrary notwithstanding, it is
understood and agreed that the Company shall not be required to keep any shelf
registration effective or useable for offers and sales of the Registrable
Securities, file a post effective amendment to a shelf registration statement or
prospectus supplement or to supplement or amend any registration statement, if
the Company is then involved in discussions concerning, or otherwise engaged in,
any material financing or investment, acquisition or divestiture transaction or
other material business purpose if the Company determines in good faith that the
making of such a filing, supplement or amendment at such time would interfere
with such transaction or purpose. The Company shall promptly give the Holders of
Registrable Securities written notice of such postponement containing a general
statement of the reasons for such postponement and an approximation of the
anticipated delay. Upon receipt by a Holder of Registrable Securities of notice
of an event of the kind described in this Section 3.01(b), such Holder shall
forthwith discontinue such Holder's disposition of Registrable Securities until
such Holder's receipt of notice from the Company that such disposition may
continue and of any supplemented or amended prospectus indicated in such notice.
The Company shall use its reasonable best efforts to permit sales of Registrable
Securities on such shelf registration statement for at least 120 days during any
360-day period. In the event the Company shall give notice of an event of the
kind described in this Section 3.01 (b), the Company shall extend the period
during which the
8
<PAGE>
applicable registration statement shall be maintained effective as provided in
Section 3.01 (a) hereof by the number of days during the period from and
including the date of the giving of such notice to the date when the Company
shall give notice to the Selling Holders that such dispositions of such
Registrable Securities may continue and shall have made available to the Selling
Holders any such supplemented or amended prospectus.
(c) The Company will, if requested, prior to filing such registration
statement or any amendment or supplement thereto, furnish to the Selling
Holders, and each applicable managing Underwriter, if any, copies thereof, and
thereafter furnish to the Selling Holders and each such Underwriter, if any,
such number of copies of such registration statement, amendment and supplement
thereto (in each case including all exhibits thereto and documents incorporated
by reference therein) and the prospectus included in such registration statement
(including each preliminary prospectus) as the Selling Holders or each such
Underwriter may reasonably request in order to facilitate the sale of the
Registrable Securities by the Selling Holders.
(d) After the filing of the registration statement, the Company will
promptly notify the Selling Holders of any stop order issued or, to the
Company's knowledge, threatened to be issued by the Commission and take all
reasonable actions required to prevent the entry of such stop order or to remove
it if entered.
(e) The Company will use its commercially reasonable efforts to qualify the
Registrable Securities for offer and sale under such other securities or blue
sky laws of such jurisdictions in the United States as the Selling Holders
reasonably request; keep each such registration or qualification (or exemption
therefrom) effective during the period in which such registration statement is
required to be kept effective; and do any and all other acts and things which
may be reasonably necessary or advisable to enable each Selling Holder to
consummate the disposition of the Registrable Securities owned by such Selling
Holder in such jurisdictions; provided that the Company will not be required to
(i) qualify generally to do business in any jurisdiction where it would not
otherwise be required to qualify but for this paragraph 3.01(e), (ii) subject
itself to taxation in any such jurisdiction or (iii) consent to general service
of process in any such jurisdiction.
(f) The Company will as promptly as is practicable notify the Selling
Holders, at any time when a prospectus relating to the sale of the Registrable
Securities is required by law to be delivered in connection with sales by an
Underwriter or dealer, of the occurrence of any event requiring the preparation
of a supplement or amendment to such prospectus so that, as thereafter delivered
to the purchasers of such Registrable Securities, such prospectus will not
contain an untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading and
promptly make available to the Selling Holders and to the Underwriters any such
supplement or amendment. Upon receipt of any notice of the occurrence of any
event of the kind described in the preceding sentence, Selling Holders will
forthwith discontinue the offer and sale of Registrable Securities pursuant to
the registration statement covering such Registrable Securities until receipt by
the Selling Holders and the Underwriters of the copies of such supplemented or
amended prospectus and, if so directed by the Company, the Selling Holders will
deliver to the Company all copies, other than permanent file copies then in the
possession of Selling Holders, of the most recent prospectus covering such
Registrable Securities at the time of receipt of such notice. In the event the
Company shall give such notice,
9
<PAGE>
the Company shall extend the period during which such registration statement
shall be maintained effective as provided in Section 3.01(a) hereof by the
number of days during the period from and including the date of the giving of
such notice to the date when the Company shall make available to the Selling
Holders such supplemented or amended prospectus.
(g) The Company will enter into customary agreements (including an
underwriting agreement in customary form) and take such other actions as are
required in order to expedite or facilitate the sale of such Registrable
Securities.
(h) At the request of any Underwriter in connection with an underwritten
offering the Company will furnish (i) an opinion of counsel, addressed to the
Underwriters, covering such customary matters as the managing Underwriter may
reasonably request and (ii) a comfort letter or comfort letters from the
Company's independent public accountants covering such customary matters as the
managing Underwriter may reasonably request.
(i) If requested by the managing Underwriter or any Selling Holder, the
Company shall promptly incorporate in a prospectus supplement or post effective
amendment such information as the managing Underwriter or any Selling Holder
reasonably requests to be included therein, including without limitation, with
respect to the Registrable Securities being sold by such Selling Holder, the
purchase price being paid therefor by the Underwriters and with respect to any
other terms of the underwritten offering of the Registrable Securities to be
sold in such offering, and promptly make all required filings of such prospectus
supplement or post effective amendment.
(j) The Company shall promptly make available for inspection by any Selling
Holder or Underwriter participating in any disposition pursuant to any
registration statement, and any attorney, accountant or other agent or
representative retained by any such Selling Holder or Underwriter (collectively,
the "Inspectors"), all financial and other records, pertinent corporate
documents and properties of the Company (collectively, the "Records"), as shall
be reasonably necessary to enable them to exercise their due diligence
responsibility, and cause the Company's officers, directors and employees to
supply all information requested by any such Inspector in connection with such
registration statement; provided, however, that unless the disclosure of such
Records is necessary to avoid or correct a misstatement or omission in the
registration statement or the release of such Records is ordered pursuant to a
subpoena or other order from a court of competent jurisdiction, the Company
shall not be required to provide any information under this subparagraph (j) if
(A) the Company believes, after consultation with counsel for the Company, that
to do so would cause the Company to forfeit an attorney-client privilege that
was applicable to such information or (B) if either (1) the Company has
requested and been granted from the Commission confidential treatment of such
information contained in any filing with the Commission or documents provided
supplementally or otherwise or (2) the Company reasonably determines in good
faith that such Records are confidential and so notifies the Inspectors in
writing unless prior to furnishing any such information with respect to (A) or
(B) such Holder of Registrable Securities requesting such information agrees to
enter into a confidentiality agreement in customary form and subject to
customary exceptions; provided further, however, that each Holder of Registrable
Securities agrees that it will, upon learning that disclosure of such Records is
sought in a court of competent jurisdiction, give notice to the Company and
allow the Company, at its expense, to undertake appropriate action and to
prevent disclosure of the Records deemed confidential.
10
<PAGE>
(k) The Company shall cause the Registrable Securities included in any
registration statement to be (A) listed on each securities exchange, if any, on
which similar securities issued by the Company are then listed, or (B)
authorized to be quoted and/or listed (to the extent applicable) on the Nasdaq
National Market if the Registrable Securities so qualify.
(l) The Company shall provide a CUSIP number for the Registrable Securities
included in any registration statement not later than the effective date of such
registration statement.
(m) The Company shall cooperate with each Selling Holder and each
Underwriter participating in the disposition of such Registrable Securities and
their respective counsel in connection with any filings required to be made with
the National Association of Securities Dealers, Inc.
(n) The Company shall during the period when the prospectus is required to
be delivered under the Securities Act, promptly file all documents required to
be filed with the Commission pursuant to Sections 13(a), 13(c), 14 or 15(d) of
the Exchange Act.
(o) The Company will make generally available to its security holders, as
soon as reasonably practicable, an earnings statement covering a period of 12
months, beginning within three months after the effective date of the
registration statement, which earnings statement shall satisfy the provisions of
Section 11(a) of the Securities Act and the rules and regulations of the
Commission thereunder.
The Company may require Selling Holders promptly to furnish in writing
to the Company such information regarding such Selling Holders, the plan of
distribution of the Registrable Securities and other information as the Company
may from time to time reasonably request or as may be legally required in
connection with such registration.
SECTION 3.02. Registration Expenses. In connection with any Registration
effected hereunder, the Company shall pay the following expenses incurred in
connection with such registration (the "Registration Expenses"): (i)
registration and filing fees with the Commission and the National Association of
Securities Dealers, Inc., (ii) fees and expenses of compliance with securities
or blue sky laws (including reasonable fees and disbursements of counsel in
connection with blue sky qualifications of the Registrable Securities), (iii)
printing expenses, (iv) fees and expenses incurred in connection with the
listing or quotation of the Registrable Securities, (v) fees and expenses of
counsel to the Company and the reasonable fees and expenses of independent
certified public accountants for the Company (including fees and expenses
associated with the special audits or the delivery of comfort letters), (vi) the
reasonable fees and expenses of any additional experts retained by the Company
in connection with such registration, (vii) all roadshow costs and expenses not
paid by the Underwriters and (viii) the reasonable fees and expenses of one
counsel for the Selling Holders.
ARTICLE IV
Indemnification and Contribution
--------------------------------
SECTION 4.01. Indemnification by the Company. The Company agrees to
indemnify and hold harmless each Selling Holder and its Affiliates and their
respective officers, directors,
11
<PAGE>
partners, stockholders, members, employees, agents and representatives and each
Person (if any) which controls a Selling Holder within the meaning of either
Section 15 of the Securities Act or Section 20 of the Exchange Act, from and
against any and all losses, claims, damages, liabilities, costs and expenses
(including reasonable attorneys' fees) caused by, arising out of, resulting from
or related to any untrue statement or alleged untrue statement of a material
fact contained or incorporated by reference in any registration statement or
prospectus relating to the Registrable Securities (as amended or supplemented if
the Company shall have furnished any amendments or supplements thereto) or any
preliminary prospectus, or caused by any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, except insofar as such losses, claims,
damages or liabilities are caused by or based upon any information furnished in
writing to the Company by or on behalf of such Selling Holder expressly for use
therein or by the Selling Holder's failure to deliver a copy of the registration
statement or prospectus or any amendments or supplements thereto after the
Company has furnished the Selling Holder with copies of the same; provided,
however, that the Company shall have no obligation to indemnify under this
sentence to the extent any such losses, claims, damages or liabilities have been
finally and non-appealably determined by a court to have resulted from such
Selling Holder's willful misconduct or gross negligence. The Company also agrees
to indemnify any Underwriters of the Registrable Securities, their officers and
directors and each person who controls such Underwriters on substantially the
same basis as that of the indemnification of the Selling Holders provided in
this Section 4.01, except insofar as such losses, claims, damages or liabilities
are caused by or based upon any information furnished in writing to the Company
by or on behalf of such Underwriter expressly for use therein or by the
Underwriter's failure to deliver a copy of the registration statement or
prospectus or any amendments or supplements thereto after the Company has
furnished the Underwriter with copies of the same; provided, however, that the
Company shall have no obligation to indemnify under this sentence to the extent
any such losses, claims, damages or liabilities have been finally and non-
appealably determined by a court to have resulted from any such Underwriter's
willful misconduct or gross negligence.
SECTION 4.02. Indemnification by Selling Holders. Each Selling Holder agrees
to indemnify and hold harmless the Company, its officers and directors, and each
Person, if any, which controls the Company within the meaning of either Section
15 of the Securities Act or Section 20 of the Exchange Act to the same extent as
the foregoing indemnity from the Company to each Selling Holder, but only with
reference to information furnished in writing by or on behalf of such Selling
Holder expressly for use in any registration statement or prospectus relating to
the Registrable Securities, or any amendment or supplement thereto, or any
preliminary prospectus. Each Selling Holder also agrees to indemnify and hold
harmless any Underwriters of the Registrable Securities, their officers and
directors and each person who controls such Underwriters on substantially the
same basis as that of the indemnification of the Company provided in this
Section 4.02, but only with reference to information furnished in writing by or
on behalf of such Selling Holder expressly for use in any registration statement
or prospectus relating to the Registrable Securities, or any amendment or
supplement thereto, or any preliminary prospectus. Each such Selling Holder's
liability under this Section 4.02 shall be limited to an amount equal to the net
proceeds (after deducting the underwriting discount and expenses) received by
such Selling Holder from the sale of such Registrable Securities by such Selling
Holder. The obligation of each Selling Holder shall be several and not joint.
12
<PAGE>
SECTION 4.03. Conduct of Indemnification Proceedings. In case any proceeding
(including any governmental investigation) shall be instituted involving any
Person in respect of which indemnity may be sought pursuant to Section 4.01 or
Section 4.02, such Person (the "Indemnified Party") shall promptly notify the
Person against whom such indemnity may be sought (the "Indemnifying Party") in
writing and the Indemnifying Party, upon the request of the Indemnified Party,
shall retain counsel reasonably satisfactory to such Indemnified Party to
represent such Indemnified Party and any others the Indemnifying Party may
designate in such proceeding and shall pay the fees and disbursements of such
counsel related to such proceeding. In any such proceeding, any Indemnified
Party shall have the right to retain its own counsel, but the fees and expenses
of such counsel shall be at the expense of such Indemnified Party unless (i) the
Indemnifying Party and the Indemnified Party shall have mutually agreed to the
retention of such counsel or (ii) the named parties to any such proceeding
(including any impleaded parties) include both the Indemnified Party and the
Indemnifying Party and, in the written opinion of counsel for the Indemnified
Party, representation of both parties by the same counsel would be inappropriate
due to actual or potential differing interests between them. It is understood
that the Indemnifying Party shall not, in connection with any proceeding or
related proceedings in the same jurisdiction, be liable for the fees and
expenses of more than one separate firm of attorneys (in addition to any local
counsel) at any time for all such Indemnified Parties, and that all such fees
and expenses shall be reimbursed as they are incurred. In the case of any such
separate firm for the Indemnified Parties, such firm shall be designated in
writing by the Indemnified Parties. The Indemnifying Party shall not be liable
for any settlement of any proceeding effected without its written consent, but
if settled with such consent (not to be unreasonably withheld), or if there be a
final judgment for the plaintiff, the Indemnifying Party shall indemnify and
hold harmless such Indemnified Parties from and against any loss or liability
(to the extent stated above) by reason of such settlement or judgment.
SECTION 4.04. Contribution. If the indemnification provided for in this
Article IV is unavailable to an Indemnified Party in respect of any losses,
claims, damages or liabilities in respect of which indemnity is to be provided
hereunder, then each such Indemnifying Party, in lieu of indemnifying such
Indemnified Party, shall to the fullest extent permitted by law contribute to
the amount paid or payable by such Indemnified Party as a result of such losses,
claims, damages or liabilities in such proportion as is appropriate to reflect
the relative fault of such party in connection with the statements or omissions
that resulted in such losses, claims, damages or liabilities, as well as any
other relevant equitable considerations. The relative fault of the Company, a
Selling Holder and the Underwriters shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by such party and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission.
The Company and each Selling Holder agrees that it would not be just and
equitable if contribution pursuant to this Section 4.04 were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation that does not take account of the
equitable considerations referred to in the immediately preceding paragraph. The
amount paid or payable by an Indemnified Party as a result of the losses,
claims, damages or liabilities referred to in the immediately preceding
paragraph shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by such Indemnified Party
in connection with investigating or defending
13
<PAGE>
any such action or claim. Notwithstanding the provisions of this Article IV, no
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price at which the securities underwritten by it and
distributed to the public were offered to the public exceeds the amount of any
damages which such Underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission, and
each Selling Holder shall not be required to contribute any amount in excess of
the amount by which the net proceeds of the offering (before deducting expenses)
received by such Selling Holder exceeds the amount of any damages which such
Selling Holder has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any Person who was not
guilty of such fraudulent misrepresentation.
ARTICLE V
Miscellaneous
-------------
SECTION 5.01. Participation in Underwritten Registrations. No Person may
participate in any underwritten registered offering contemplated hereunder
unless such Person (a) agrees to sell its securities on the basis provided in
any underwriting arrangements approved by the Persons entitled hereunder to
approve such arrangements, (b) completes and executes all questionnaires, powers
of attorney, custody arrangements, indemnities, underwriting agreements and
other documents reasonably required under the terms of such underwriting
arrangements and this Agreement and (c) furnishes in writing to the Company such
information regarding such Person, the plan of distribution of the Registrable
Securities and other information as the Company may from time to time request or
as may be legally required in connection with such registration; provided,
however, that no such Person shall be required to make any representations or
warranties in connection with any such registration other than representations
and warranties as to (i) such Person's ownership of his or its Registrable
Securities to be sold or transferred free and clear of all liens, claims and
encumbrances, (ii) such Person's power and authority to effect such transfer and
(iii) such matters pertaining to compliance with securities laws as may be
reasonably requested; provided further, however, that the obligation of such
Person to indemnify pursuant to any such underwriting agreements shall be
several, not joint and several, among such Persons selling Registrable
Securities, and the liability of each such Person will be in proportion to, and
provided further that such liability will be limited to, the net amount received
by such Person from the sale of such Person's Registrable Securities pursuant to
such registration.
SECTION 5.02. Rule 144. The Company covenants that it will file any reports
required to be filed by it under the Securities Act and the Exchange Act and
that it will take such further action as the Holders may reasonably request to
the extent required from time to time to enable the Holders to sell Registrable
Securities without registration under the Securities Act within the limitation
of the exemptions provided by Rule 144 under the Securities Act, as such Rule
may be amended from time to time, or any similar rule or regulation hereafter
adopted by the Commission. Upon the request of any Holder, the Company will
deliver to such Holder a written statement as to whether it has complied with
such reporting requirements.
14
<PAGE>
SECTION 5.03. Holdback Agreements. Each Holder agrees, in the event of an
underwritten offering by the Company (whether for the account of the Company or
otherwise) not to offer, sell, contract to sell or otherwise dispose of any
Registrable Securities, or any securities convertible into or exchangeable or
exercisable for such securities, including any sale pursuant to Rule 144 under
the Securities Act (except as part of such underwritten offering), during the 14
days prior to, and during the 120-day period (or such lesser period as the lead
or managing underwriters may require) beginning on, the effective date of the
registration statement for such underwritten offering (or, in the case of an
offering pursuant to an effective shelf registration statement pursuant to Rule
415, the pricing date for such underwritten offering).
SECTION 5.04. Termination. The registration rights granted under this
Agreement will terminate on March 31, 2015, or such earlier time as there shall
no longer be any Registrable Securities; provided, however, that if all shares
of Series E Preferred Stock outstanding on such date shall not have been
redeemed in full in accordance with Section 10 of the Certificate of
Designations, this Agreement shall remain in full force and effect with respect
to the Registrable Securities until such time as the shares of Series E
Preferred Stock have been so redeemed in full.
SECTION 5.05. Amendments, Waivers, Etc. This Agreement may not be amended,
waived or otherwise modified or terminated except by an instrument in writing
signed by the Company and the Holders of at least 50% of the Registrable
Securities then held by all the Holders, if the amendment is to be effective
against the Holders.
SECTION 5.06. Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement. Each
party need not sign the same counterpart.
SECTION 5.07. Entire Agreement. This Agreement constitutes the entire
agreement and supersedes all prior agreements and understandings, both written
and oral, among the parties with respect to the subject matter hereof.
SECTION 5.08. Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of New York regardless of
the laws that might otherwise govern under applicable principles of conflicts of
law thereof.
SECTION 5.09. Assignment of Registration Rights. Each Holder of the
Registrable Securities may assign all or any part of its rights under this
Agreement to any person to whom such Holder sells, transfers or assigns such
Registrable Securities. In the event that the Holder shall assign its rights
pursuant to this Agreement in connection with the transfer of less than all its
Registrable Securities, the Holder shall also retain his rights with respect to
its remaining Registrable Securities.
SECTION 5.10. Consent. The Company will use its best efforts to obtain the
consent of "Holders of 60% or more of the outstanding Registrable Securities"
(as such terms are defined in the Investors Rights Agreement ) (i) acknowledging
that the Holders of the Registrable Securities are new preferred stock investors
in the Company within the meaning of Section 3.3 of the Investors Rights
Agreement and (ii) consenting (if necessary in light of (i)) to the waiver of
Section 1.14(b) of the Investors Rights Agreement with respect to registrations
effected pursuant to this Agreement. If the Company does not obtain the
requisite consent referred to in the
15
<PAGE>
preceding sentence prior to the first anniversary of the Closing Date (a
"Nonconsent Event"), the shelf registration rights set forth in Section 2.03
shall be adjusted as provided therein.
16
<PAGE>
IN WITNESS WHEREOF, the Company and each Holder has caused this Agreement
to be signed on its behalf by its officer thereunto duly authorized as of the
date first written above.
RHYTHMS NETCONNECTIONS INC.
By:
-------------------------------------
Name:
Title:
HMTF BRIDGE RHY, LLC
HM4 RHYTHMS QUALIFIED FUND, LLC
HM4 RHYTHMS PRIVATE FUND, LLC
HM PG-IV RHYTHMS, LLC
HM 4-SBS RHYTHMS COINVESTORS, LLC
HM 4-EQ RHYTHMS COINVESTORS, LLC
By:
-------------------------------------
Name:
Title:
[SIGNATURE PAGE FOR RHYTHMS NETCONNECTIONS INC.
REGISTRATION RIGHTS AGREEMENT]
17
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Number Purchase Price
Purchasers of Shares of the Shares
- ---------- --------- --------------
<S> <C> <C>
HMTF Bridge RHY, LLC 125,000 $125,000,000
HM4 Rhythms Qualified Fund, LLC 113,743 113,743,000
HM4 Rhythms Private Fund, LLC 806 806,000
HM PG-IV Rhythms, LLC 6,056 6,056,000
HM 4-SBS Rhythms Coinvestors, LLC 2,724 2,724,000
HM 4-EQ Rhythms Coinvestors, LLC 1,671 1,671,000
</TABLE>
18
<PAGE>
Exhibit 10.33
JOINT VENTURE AGREEMENT
between
RHYTHMS NETCONNECTIONS INC. and RHYTHMS LINKS, INC.,
Delaware corporations,
and
OPTEL COMMUNICATIONS CORPORATION,
an Ontario corporation,
to form
RHYTHMS CANADA INC.,
a corporation incorporated under the laws of New Brunswick.
Dated January 1, 2000
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
ARTICLE I DEFINITIONS........................................................ 1
1.1 "Affiliate".............................................. 1
1.2 "Annual Budgets"......................................... 2
1.3 "Ancillary Agreements"................................... 2
1.4 "Articles of Incorporation".............................. 2
1.5 "Board".................................................. 2
1.6 "Bona Fide Offer"........................................ 2
1.7 "Business Day"........................................... 2
1.8 "Business Deadlock"...................................... 2
1.9 "Business Plan".......................................... 2
1.10 "Bylaws"................................................. 2
1.11 "Canadian Carrier Telecommunications Assets"............. 2
1.12 "Canadian Communications Market"......................... 2
1.13 "Capital Budget"......................................... 2
1.14 "Capital Call"........................................... 2
1.15 "Chairperson"............................................ 3
1.16 "Change Order Proposal".................................. 3
1.17 "Confidential Information"............................... 3
1.18 "CRTC"................................................... 3
1.19 "Customer Requirement Modification Notice"............... 3
1.20 "Customer Requirement Notice"............................ 3
1.21 "Customer Premises Equipment"............................ 3
1.22 "Data Network Equipment"................................. 3
1.23 "Data Products".......................................... 4
1.24 "Data Products and Services Support Center".............. 4
1.25 "Data Services".......................................... 4
1.26 "Direct Cost"............................................ 4
1.27 "Director"............................................... 4
1.28 "Disclosing Party"....................................... 4
1.29 "Dollars" and "$"........................................ 4
1.30 "DSL".................................................... 4
1.31 "Effective Date"......................................... 4
1.32 "Event of Withdrawal".................................... 4
1.33 "Fair Market Value"...................................... 5
1.34 "Human Resources Plan"................................... 5
1.35 "Independent Appraiser".................................. 5
1.36 "Independent Businesses"................................. 5
1.37 "ILEC"................................................... 5
1.38 "ISP".................................................... 5
1.39 "JVCO"................................................... 5
1.40 "JVCO Auditor"........................................... 5
1.41 "JVCO Business".......................................... 5
1.42 "JVCO Communications Markets"............................ 5
i
<PAGE>
TABLE OF CONTENTS (Continued)
-----------------
1.43 "JVCO Customers"............................... 6
1.44 "JVCO Dedicated Assets"........................ 6
1.45 "Majority Decision"............................ 6
1.46 "Network Operations Support Center"............ 6
1.47 "OCI".......................................... 6
1.48 "Operating Budget"............................. 6
1.49 "Operating Plan"............................... 6
1.50 "OPTEL"........................................ 6
1.51 "Optel Pre-Existing Customers"................. 6
1.52 "Optel Combined Service Customers"............. 6
1.53 "Optel Customer Base".......................... 6
1.54 "Optel Outsourced Services".................... 6
1.55 "Outsourced Services".......................... 6
1.56 "Outsourcing Proposal"......................... 6
1.57 "Party" and "Parties".......................... 6
1.58 "Percentage Shares"............................ 7
1.59 "Person"....................................... 7
1.60 "Prime Rate"................................... 7
1.61 "Quarterly Outlook"............................ 7
1.62 "Receiving Party".............................. 7
1.63 "Regulatory Requirements"...................... 7
1.64 "RHYTHMS"...................................... 7
1.65 "Rhythms Outsourced Services".................. 7
1.66 "Seconded Employees"........................... 7
1.67 "Share"........................................ 7
1.68 "Shared Assets"................................ 7
1.69 "Small and Medium Business Customers".......... 7
1.70 "Subscription Agreement"....................... 7
1.71 "Telecommunications Provider".................. 7
1.72 "Telecommunications Services".................. 8
1.73 "Third Party".................................. 8
1.74 "Unanimous Decision"........................... 8
1.75 "Underlying Network Facilities"................ 8
1.76 "Voice Services"............................... 8
ARTICLE II CORPORATE ORGANIZATION....................................... 8
2.1 Formation...................................... 8
2.2 Name........................................... 8
2.3 Place of Business.............................. 8
2.4 Conduct of JVCO Business....................... 8
2.5 Independent Organization....................... 9
2.6 Duration of Corporation........................ 9
2.7 Title to JVCO Property......................... 9
2.8 Partition..................................... 10
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TABLE OF CONTENTS (Continued)
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Page
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2.9 Fiscal Year............................................. 10
ARTICLE III CAPITAL STRUCTURE AND FINANCING.................................. 10
3.1 Capital Structure....................................... 10
3.2 Capital Contributions................................... 10
3.3 Dividend Policy......................................... 12
3.4 Redemption of Series A Preferred Shares................. 12
ARTICLE IV MANAGEMENT........................................................ 12
4.1 Board of Directors...................................... 12
4.2 Officers................................................ 14
4.3 Authority of the Board and Officers..................... 14
4.4 Provisions for Dealing with Board Deadlock.............. 18
4.5 JVCO Plans and Budgets.................................. 18
4.6 Accounting and Internal Controls........................ 19
4.7 Access to Books and Records............................. 20
ARTICLE V CONTRIBUTED RESOURCES.............................................. 20
5.1 Seconded Employees...................................... 20
5.2 Outsourced Services..................................... 21
5.3 Optel Leased Assets..................................... 23
5.4 Trademark Licenses...................................... 24
5.5 Technology Licenses..................................... 24
5.6 Non-Competition; Other Businesses....................... 24
5.7 Non-Solicitation of Employees........................... 27
5.8 Transition of Business.................................. 27
ARTICLE VI CONFIDENTIAL INFORMATION.......................................... 28
6.1 Treatment of Confidential Information................... 28
6.2 Copying Confidential Information........................ 29
6.3 Time Period............................................. 29
6.4 Remedies................................................ 29
6.5 Confidential Information of JVCO........................ 29
ARTICLE VII SHARE TRANSFER RESTRICTIONS...................................... 29
7.1 Transfer Restrictions................................... 29
7.2 Buy-Sell Option......................................... 32
7.3 Additional Parties...................................... 32
7.4 Event of Withdrawal..................................... 33
ARTICLE VIII REPRESENTATIONS AND WARRANTIES.................................. 33
8.1 Mutual Representations and Warranties................... 33
8.2 Additional Representations, Warranties and Covenants.... 34
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TABLE OF CONTENTS (Continued)
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ARTICLE IX TERMINATION....................................................... 35
9.1 General.............................................. 35
9.2 Termination by a Party for Cause..................... 35
9.3 Liquidation; Survival................................ 36
ARTICLE X MISCELLANEOUS PROVISIONS........................................... 36
10.1 Publicity............................................ 36
10.2 Assignment........................................... 36
10.3 Governing Law........................................ 36
10.4 Force Majeure........................................ 36
10.5 Waiver............................................... 37
10.6 Notice, Consents, Etc................................ 37
10.7 Entire Agreement..................................... 38
10.8 Headings............................................. 38
10.9 Severability......................................... 38
10.10 Dispute Resolution................................... 38
10.11 Counterparts......................................... 39
10.12 Expenses............................................. 39
10.13 Applicable Laws and Regulations...................... 39
10.14 Indemnities.......................................... 39
10.15 Ancillary Agreements................................. 39
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TABLE OF CONTENTS (Continued)
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Page
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SCHEDULE 1.25 DATA SERVICES................................................. 42
SCHEDULE 1.3 ANCILLARY AGREEMENTS........................................... 44
SCHEDULE 1.42 COMMUNICATIONS MARKETS........................................ 45
SCHEDULE 1.43 PRELIMINARY CUSTOMERS......................................... 46
SCHEDULE 4.1(a) INITIAL BOARD OF DIRECTORS.................................. 47
SCHEDULE 4.5(a) INITIAL BUSINESS PLAN AND SUPPORTING FINANCIAL INFORMATION.. 48
SCHEDULE 5.1(a) PRELIMINARY HUMAN RESOURCES PLAN............................ 49
SCHEDULE 5.3(a) OPTEL LEASED ASSETS......................................... 50
EXHIBIT A FORM OF ARTICLES OF INCORPORATION................................. 1
EXHIBIT B FORM OF BYLAWS.................................................... 1
EXHIBIT C FORMS OF EMPLOYEE PROPRIETARY INFORMATION AND
INVENTIONS AGREEMENTS.......................................... 1
EXHIBIT D FORM OF TRADEMARK LICENSING AGREEMENT............................. 1
EXHIBIT E FORM OF TECHNOLOGY LICENSE AGREEMENTS............................. 1
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JOINT VENTURE AGREEMENT
-----------------------
This Joint Venture Agreement ("Agreement") is entered into as of January 1,
2000 (the "Effective Date"), between Rhythms NetConnections Inc. and Rhythms
Links, Inc., corporations formed under and governed by the laws of the State of
Delaware and having their principal place of business at 6933 South Revere
Parkway, Englewood, Colorado 80112-3931 (collectively, with their Affiliates (as
defined below), "RHYTHMS"), and Optel Communications Corporation, a corporation
incorporated under the laws of the Province of Ontario and having its principal
place of business at 111 Peter Street, Toronto, Ontario M5V 2H1 (collectively,
with its Affiliates, "OPTEL").
RECITALS
--------
WHEREAS, OPTEL, a wholly-owned subsidiary of OCI Communications Inc.
("OCI"), is engaged in the business of providing telecommunications services in
selected markets of Canada as a Competitive Local Exchange Carrier ("CLEC"); and
WHEREAS, RHYTHMS is engaged in the business of providing data
communications products and services within the United States of America
("U.S.") and, in the course of such efforts, has developed significant technical
and marketing expertise related to the same; and
WHEREAS, RHYTHMS and OPTEL desire to establish a joint venture through the
formation of a corporation in Canada ("JVCO") in order to create a national
presence in Canada for the purpose of marketing and providing data
communications products and services to select customers within selected local
markets in Canada; and
WHEREAS, RHYTHMS and OPTEL will make substantially equal contributions to
the initial capital investment in JVCO as reflected by OPTEL's initial
US$10,000,000 funding of JVCO in exchange for RHYTHMS investment of US$5,300,000
in equity securities of OCI.
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained in this Agreement and other good and valuable consideration, receipt
and sufficiency of which are acknowledged, the parties agree as follows:
ARTICLE I
DEFINITIONS
-----------
As used in this Agreement, the following capitalized terms, whether used in
the singular or the plural, will have the following meanings:
1.1 "Affiliate" means with respect to a specified entity, an entity that
directly, or indirectly through one or more intermediaries, controls, is
controlled by, or is under common control with the entity specified, except for
JVCO. For purposes of this Section 1.1, "control" means the possession, direct
or indirect, of the power to direct or cause the direction of the management and
policies of an entity, whether through the ownership of voting securities, by
contract, or otherwise.
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1.2 "Annual Budgets" means the budgets described in Section 4.5(b)(i) of
this Agreement.
1.3 "Ancillary Agreements" means the agreements described in Schedule 1.3
to this Agreement.
1.4 "Articles of Incorporation" means the articles of incorporation for
JVCO to be filed in accordance with the laws of the Province of New Brunswick in
substantially the form attached hereto as Exhibit A.
1.5 "Board" means the Board of Directors of JVCO described in Section 4.1
of this Agreement.
1.6 "Bona Fide Offer" means a written offer from a Third Party, with the
required financial means, to purchase all or any portion of a Party's interest
in JVCO from such Party wishing to sell on the same terms and conditions
contained in such offer.
1.7 "Business Day" means any day except a Saturday, Sunday, statutory
holiday in Toronto, Ontario, or any day on which banks in the United States are
not open for regular business.
1.8 "Business Deadlock" means (a) the inability of the Board to obtain the
unanimous consent of all Board members for any Unanimous Decision or (b) the
inability to obtain the majority consent of the Board for any other decision,
for a period of at least sixty (60) days from the time the decision at issue was
initially presented to the Board for action.
1.9 "Business Plan" means the business plan of JVCO, as amended and in
effect from time to time, described in Section 4.5(a) of this Agreement. The
Parties have agreed on the initial Business Plan, which is set forth as Schedule
4.5(a) to this Agreement.
1.10 "Bylaws" means the bylaws of JVCO as amended from time to time in
substantially the form attached hereto as Exhibit B.
1.11 "Canadian Carrier Telecommunications Assets" means those assets and
facilities that can only be owned and operated by a telecommunications common
carrier in accordance with the Canadian Telecommunications Act and the Canadian
Telecommunications Common Carrier Ownership and Control Regulations.
1.12 "Canadian Communications Market" means the market for communications
goods and services within the geographic area of the country of Canada.
1.13 "Capital Budget" means the annual capital expenditures budget
described in Section 4.5 of this Agreement.
1.14 "Capital Call" means the installment payment by a Party of additional
capital contributions described in Section 3.2(d) of this Agreement.
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1.15 "Chairperson" means chairperson of the Board described in Section
4.1(e) of this Agreement.
1.16 "Change Order Proposal" means the proposal described in Section
5.2(d) of this Agreement.
1.17 "Confidential Information" means any and all technical and business
information of JVCO, a Party or an Affiliate of a Party (the "Disclosing
Party"), that is (a) material, competitively sensitive, and not generally known
in the industry or the public, including but not limited to trade secrets and
proprietary information, in whatever form or medium (including, but not limited
to product/service specifications, prototypes, computer programs, methods of
equipment interconnection, drawings, models, marketing plans, financial data),
and (b) obtained by any other Person including JVCO, a Party or an Affiliate of
a Party (the "Receiving Party"): (i) through the working arrangement between the
Disclosing Party and Receiving Party, regardless whether a formal "disclosure"
event occurs; (ii) disclosed in writing and marked or otherwise indicated orally
or in writing as Confidential Information; (iii) disclosed orally and identified
as Confidential Information at the time of disclosure; or (iv) which the
Receiving Party knows or has reason to know is Confidential Information. For the
purposes of this definition, any technical or business information of a Third
Party furnished or disclosed by one Party to another will be deemed Confidential
Information of the Disclosing Party unless otherwise specifically indicated in
writing to the contrary.
Information will not be considered Confidential Information if it is: (i)
in the public domain without breach of this Agreement; (ii) developed
independently, with no effort or thought of circumventing or contravening the
rights of the Party or Person owning the information; (iii) lawfully disclosed,
without breach of a nondisclosure agreement, from a Third Party under no
restriction on disclosure; or (iv) documented as being known to the Receiving
Party, or in the Receiving Party's lawful possession, without burden of
confidentiality, prior to its disclosure hereunder.
1.18 "CRTC" means the Canadian Radio-television and Telecommunications
Commission.
1.19 "Customer Requirement Modification Notice" means the notice to JVCO
of modified customer requirements as described in Section 5.6(b)(ii)of this
Agreement.
1.20 "Customer Requirement Notice" means the notice to JVCO of modified
customer requirements as described in Section 5.6(b)(i)of this Agreement.
1.21 "Customer Premises Equipment" means equipment employed on the
premises of a Person (other than a carrier) to originate, route, or terminate
telecommunications.
1.22 "Data Network Equipment" means data networking equipment, including
(without limitation), OSI layer 2 switches and layer 3 routers and Digital
Subscriber Line Access Multiplexers (DSLAM) that are utilized in connection with
Underlying Network Facilities for the purposes of providing Data Services.
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1.23 "Data Products" means the Customer Premises Equipment which is
necessary for JVCO Customers to access Data Services.
1.24 "Data Products and Services Support Center" means the centralized
support center that will manage JVCO's Data Network Equipment and Underlying
Network Facilities by providing services such as monitoring, reconfiguring, and
troubleshooting, as well as providing customer support services to JVCO
Customers.
1.25 "Data Services" means those services that are expressly defined on
Schedule 1.25 of this Agreement or that may be added to the Schedule 1.25 from
time to time upon the Unanimous Decision of the Board; except that Data Services
shall not include Voice Services.
1.26 "Direct Cost" means:
(a) with regard to any services to be performed, the actual salaries
of the individuals for the time expended in performing such services plus all
attendant benefit expenses for each such individual;
(b) with regard to third-party provided products and services, the
actual invoiced amount plus any applicable taxes; and
(c) with regard to any regulated functions to be performed by the
Parties or their Affiliates, the fully distributed cost. Direct Cost will also
include an allocation of shared and other costs, including overhead costs, which
increase directly in proportion to the activity.
1.27 "Director" means a member of the Board as described in Section 4.1(a)
of this Agreement.
1.28 "Disclosing Party" means the Person disclosing Confidential
Information as described in Section 1.17 of this Agreement.
1.29 "Dollars" and "$" mean dollars in currency of the United States of
America unless otherwise specifically indicated.
1.30 "DSL" means digital subscriber line and related technology as
described in Schedule 1.25 to this Agreement.
1.31 "Effective Date" means the date set forth in the preamble to this
Agreement.
1.32 "Event of Withdrawal" means the occurrence of any of the following:
(a) the dissolution or the revocation of a Party's charter or
certificate of incorporation; provided, however, that the merger of a Party with
an Affiliate will not be considered an Event of Withdrawal for the purposes of
this Agreement;
(b) the dissolution and commencement of winding up a Party;
4
<PAGE>
(c) the entry of a final order by a court of competent jurisdiction
adjudicating any Party to be incapable of performing such Party's obligations
under this Agreement (in which case the effective date of withdrawal will be the
date such decree is entered);
(d) the filing by a Party of any petition in bankruptcy or for
reorganization, management, composition, re-adjustment, liquidation or similar
relief under any statute, law or regulation governing the rights and relief of
debtors; or the adjudication of a Party as bankrupt or insolvent; or the
application by a Party for or such Party's consent to or acquiescence in the
appointment of a trustee, receiver or liquidator for all or any substantial part
of such Party's assets; or the making by a Party of an assignment for the
benefit of creditors; or any substantially similar action on the part of a
Party.
1.33 "Fair Market Value" means the fair market value assigned to the
object or interests being valued as will be conclusively determined by the
Independent Appraiser. For the sole purpose of determining the Fair Market
Value, the Independent Appraiser shall be given access and may review all books
and records of, and information available for, JVCO.
1.34 "Human Resources Plan" means the human resources plan of JVCO, as
amended and in effect from time to time, described in Section 5.1(a) of this
Agreement. The Parties have agreed on the initial Human Resources Plan, which is
set forth as Schedule 5.1(a) to this Agreement.
1.35 "Independent Appraiser" means the appraisal firm which is selected by
a Unanimous Decision of the Board.
1.36 "Independent Businesses" means the separate businesses of the Parties
as described in Section 5.6(h)(ii) of this Agreement.
1.37 "ILEC" means an Incumbent Local Exchange Carrier in Canada.
1.38 "ISP" means Internet Service Provider, an entity that provides direct
access to the Internet.
1.39 "JVCO" means the corporation referenced in the recitals of this
Agreement (and any successor entity to JVCO in the form of a corporation during
the term of this Agreement).
1.40 "JVCO Auditor" means the outside accountants of JVCO described in
Section 4.3(e)(ix) of this Agreement.
1.41 "JVCO Business" means the development, marketing and sale of the Data
Products and Data Services, either directly or through subsidiaries or
Affiliates or Third Parties to JVCO Customers in accordance with the Business
Plan.
1.42 "JVCO Communications Markets" means the markets in which JVCO
provides communications goods and services as described in Schedule 1.42 to this
Agreement.
5
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1.43 "JVCO Customers" means the wholesale customers, large business
customers (excluding Small and Medium Business Customers) and residential
customers (if and when approved by the Board) in the JVCO Communications Markets
as set forth on Schedule 1.43.
1.44 "JVCO Dedicated Assets" means those assets loaned or leased to JVCO
by a Party that are utilized as a necessary part of the JVCO Business, but
excluding Shared Assets.
1.45 "Majority Decision" means a decision of the Board as described in
Section 4.3(e) of this Agreement.
1.46 "Network Operations Support Center" means the centralized support
center which will manage the Underlying Network Facilities which are used by
JVCO in connection with its Data Services by providing services such as
monitoring, reconfiguring, and troubleshooting.
1.47 "OCI" means the corporation described in the recitals to this
Agreement.
1.48 "Operating Budget" means the annual operating budget described in
Section 4.5 of this Agreement.
1.49 "Operating Plan" means the plan for implementing the Business Plan as
described in Section 4.5 of this Agreement.
1.50 "OPTEL" means the corporation described in the preamble to this
Agreement.
1.51 "Optel Pre-Existing Customers" means the customers of OPTEL prior to
the Effective Date as set forth on Schedule 1.43.
1.52 "Optel Combined Service Customers" means the prospective customers of
OPTEL for the provision of combined voice and data services as set forth on
Schedule 1.43.
1.53 "Optel Customer Base" means the group or groups of customers
comprised of Small and Medium Business Customers, Optel Pre-Existing Customers
and Optel Combined Service Customers.
1.54 "Optel Outsourced Services" means services provided to JVCO by OPTEL
as described in Section 5.2(b) of this Agreement.
1.55 "Outsourced Services" means services provided to JVCO by the Parties
as described in Section 5.2 of this Agreement.
1.56 "Outsourcing Proposal" means the proposal described in Section 5.2(d)
of this Agreement.
1.57 "Party" and "Parties" mean RHYTHMS and OPTEL and each permitted
successor and assign of such Party which executes a written agreement to be
bound by the terms of this Agreement.
6
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1.58 "Percentage Shares" means, as to each Party, the percentage ownership
of issued and outstanding Class A Voting Shares of JVCO.
1.59 "Person" means any natural person, estate, trust, corporation,
company, limited liability company, limited company, or other entity, legal or
otherwise, recognized at law.
1.60 "Prime Rate" means the prime rate of interest as published in the
Wall Street Journal under the heading "Money Rates" (if there is more than one,
then the highest) three editions prior to the date on which the event that gave
rise under this Agreement to the need to refer to such Prime Rate.
1.61 "Quarterly Outlook" means the quarterly forecast described in Section
4.5(b)(ii) of this Agreement.
1.62 "Receiving Party" means the Person receiving Confidential Information
as described in Section 1.17 of this Agreement.
1.63 "Regulatory Requirements" means all applicable laws, orders, rules,
and regulations of any regulatory agency, including, without limitation,
individual state and provincial regulatory commissions and the CRTC, which
relate to JVCO Customers.
1.64 "RHYTHMS" means, collectively, the corporations described in the
preamble to this Agreement.
1.65 "Rhythms Outsourced Services" means services provided to JVCO by
RHYTHMS as described in Section 5.2(b) of this Agreement.
1.66 "Seconded Employees" means employees of the Parties described in
Section 5.1 of this Agreement.
1.67 "Share" means any share or unit representing an equity interest of
JVCO under the Articles of Incorporation, regardless of label or designation.
1.68 "Shared Assets" means those assets loaned or leased to JVCO by a
Party that are also utilized as a necessary part of such Party's business to
provide data and telecommunications products and services to non-JVCO Customers.
1.69 "Small and Medium Business Customers" means small and medium-sized
business entities in the JVCO Communications Markets as set forth on Schedule
1.43.
1.70 "Subscription Agreement" means that certain Subscription and Purchase
Agreement between RHYTHMS and OCI Communications Inc. dated October 26, 1999.
1.71 "Telecommunications Provider" means an entity which leases, owns
and/or operates Underlying Network Facilities within a Canadian Communications
Market other than OPTEL.
7
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1.72 "Telecommunications Services" means the transmission of
communications between and among various geographic locations.
1.73 "Third Party" means any entity which is not a Party or an Affiliate
of a Party to this Agreement.
1.74 "Unanimous Decision" means a decision of the Board as described in
Section 4.3(d) of this Agreement.
1.75 "Underlying Network Facilities" means transmission equipment and
associated electronics that are used to facilitate Telecommunications Services
that are provided by broadband network, including, without limitation, unbundled
local loop, wire, cable, fiber optics, private lines, DSOs, DS1s, and DS3s.
1.76 "Voice Services" means those services that provide the transmission
of voice data over DSL.
ARTICLE II
CORPORATE ORGANIZATION
----------------------
2.1 Formation. On or before the Effective Date, the Parties shall cause
JVCO to be incorporated as a corporation pursuant to the laws of the Province of
New Brunswick. The initial Articles of Incorporation and Bylaws of JVCO shall be
in substantially the form attached hereto as Exhibit A and Exhibit B,
respectively.
2.2 Name. The name of JVCO shall be "Rhythms Canada Inc." or such other
name as the Board may from time to time determine. The Board will cause to be
filed on behalf of JVCO such business name registrations as may from time to
time be required by law.
2.3 Place of Business. The principal place of business of JVCO will be 111
Peter Street, Toronto, Ontario M5V 2H1. The Board may, at any time and from time
to time, change the location of JVCO's principal place of business and establish
such additional place or places of business of JVCO.
2.4 Conduct of JVCO Business.
(a) The Parties shall organize JVCO for the purpose of developing and
providing, alone or in combination with others, directly or indirectly, Data
Products and Data Services that utilize DSL to JVCO Customers located in the
JVCO Communications Markets.
(b) Each Party shall vote its Shares and shall take all other actions
reasonably necessary to ensure that the Articles of Incorporation and Bylaws do
not at any time conflict with the provisions of this Agreement. In the event of
a conflict between this Agreement and the Articles of Incorporation and Bylaws,
the terms of this Agreement shall prevail.
(c) In order to accomplish and give effect to this Agreement, each
Party covenants and agrees to vote, or cause to be voted, the Shares owned by it
in accordance with the
8
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provisions and intent of this Agreement. Each Party also covenants and agrees
that it will at all times vote and act and take all such steps as may be
reasonably within its power and use reasonable commercial efforts to cause JVCO
to act in accordance with the provisions and intent of this Agreement.
(d) The operations of JVCO shall be in compliance with all laws
applicable thereto and be conducted to avoid the application of any penalty,
sanction or loss to JVCO. The Parties will respectively use reasonable efforts
to channel to JVCO appropriate business opportunities in the JVCO Communications
Markets of which the Parties become aware, and jointly consider ways in which
they can promote, support and market the Data Products and Data Services of
JVCO, provided that nothing in the foregoing shall be construed to limit either
Party in any way from conducting their own Independent Businesses in their sole
discretion.
2.5 Independent Organization.
(a) The Parties agree that JVCO shall be operated by the Board as an
independent legal and economic entity in accordance with this Agreement and
applicable law. JVCO shall be solely and independently responsible for the Data
Products and Data Services, including without limitation (a) the adoption of
policies regarding pricing, marketing, sales and promotions, and operations and
(b) the planning and strategic direction of the Data Products and Data Services.
The Board, Parties and management of JVCO, in their respective capacities as
directors, officers or employees of JVCO, shall at all times act in the best
interests of JVCO. Except as set forth herein, neither Party shall be obligated
to act in a manner that would be detrimental to their Independent Businesses.
(b) The Parties agree to provide sufficient personnel and outsourced
services to JVCO in accordance with Sections 5.1 and 5.2 of this Agreement and
the Business Plan in effect from time to time.
(c) Each Party hereby assures the other, and further agrees to be
responsible for ensuring, that any management or other personnel nominated,
appointed or otherwise supplied by it, in their respective capacities as
directors, officers or employees of JVCO, shall abide by the terms of this
Agreement and act impartially and in the best interests of JVCO. Nothing herein
shall be interpreted as precluding or lessening the obligations and duties that
directors, officers and employees may have to the Parties or that a Party shall
have to its shareholders.
2.6 Duration of Corporation. The term of this Agreement will commence on
the Effective Date and, unless otherwise extended by the mutual agreement of the
Parties, will continue until dissolution and termination of JVCO as provided in
Article IX below.
2.7 Title to JVCO Property. All property owned by JVCO, whether real or
personal, tangible or intangible, will be deemed to be owned by JVCO as an
entity, and no Party, individually, will have direct ownership of such property.
JVCO may hold any of its assets in its own name or in the name of its nominee,
which nominee may be one or more individuals, corporations, trusts or other
entities.
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2.8 Partition. No Party, nor any successor-in-interest to any Party, will
have the right while this Agreement remains in effect to have the property of
JVCO partitioned, or to file a complaint or institute any proceeding at law or
in equity to have the property of JVCO partitioned, and each Party, on behalf of
itself, its successors and assigns, waives any such right. It is the intention
of the Parties that during the term of this Agreement, the rights of the Parties
and their successors-in-interest, as among themselves, will be governed by the
terms of this Agreement, and that the right of any Party or its successors-in-
interest to assign, transfer, sell or otherwise dispose of its interest in
JVCO's properties will be subject to the limitations and restrictions of this
Agreement.
2.9 Fiscal Year. The fiscal year of JVCO will end on the last day of
December of each calendar year.
ARTICLE III
CAPITAL STRUCTURE AND FINANCING
-------------------------------
3.1 Capital Structure. The capital structure of JVCO shall be composed of:
(a) common shares (the "Common Shares") which shall be divided into
two classes: (i) an unlimited number of Class A Voting Shares, of which one
hundred thousand (100,000) shares shall be issued to RHYTHMS and one hundred
thousand (100,000) shares shall be issued to OPTEL pursuant to Section 3.2(a) of
this Agreement; and (ii) an unlimited number of Class B Non-Voting Shares which
shall be reserved for issuance in the form of options or shares, as determined
by the Board, to employees and consultants of JVCO pursuant to incentive
agreements and on such terms as approved in accordance with this Agreement; and
(b) an unlimited number of preferred shares issuable in series, of
which ten million (10,000,000) shares of Series A Preferred Shares with a
redemption amount of US$1.00 per share shall be issued to OPTEL pursuant to
Section 3.2(b) of this Agreement. The Series A Preferred Shares shall have no
voting or conversion rights, but shall earn dividends at a rate of six percent
(6%) per annum payable only upon redemption in accordance with Section 3.4. The
rights and obligations of the Common Shares and Preferred Shares shall be
substantially as set forth in the Articles of Incorporation attached hereto as
Exhibit A.
3.2 Capital Contributions.
(a) Initial Capital Contributions in Exchange for Class A Voting
Shares. On or before the Effective Date, each Party shall subscribe for and
purchase one hundred thousand (100,000) Class A Voting Shares at an issue price
of US$0.001 per share.
(b) Initial Capital Contributions in Exchange for Series A Preferred
Shares. On or before the Effective Date, OPTEL shall subscribe for and purchase
one million (1,000,000) shares of Series A Preferred Shares at an issue price of
US$1.00 per share. No later than fifteen (15) Business Days following approval
of the initial Business Plan by the Board, OPTEL shall subscribe for and
purchase the remaining nine million (9,000,000) shares of Series A Preferred
Shares at an issue price of US$1.00 per share.
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(c) Third-Party Financing. Notwithstanding the power of the Board to
obtain additional capital contributions from the Parties pursuant to Section
3.2(d), the Parties intend that JVCO shall be self-financed with (i) debt
financing from Third Parties, without such financing involving any recourse to
the Parties as shareholders of JVCO, and/or (ii) equity financing through
private placements to Third Parties and/or an initial public offering by JVCO.
(d) Installments of Capital Contributions. To the extent that JVCO is
unable to receive sufficient amounts of financing through Third Parties, the
Parties shall be obligated to provide additional capital contributions through
installments as set forth in the Annual Budgets and as approved by the Board
("Capital Calls").
(i) At the beginning of each fiscal quarter, each Party shall
contribute to JVCO such cash amounts as required by the Capital Call identified
in the Quarterly Outlook preceding such fiscal quarter.
(ii) Each Party's obligation to make its share of each installment of
additional capital contributions shall be subject to satisfaction, on or before
the beginning of the fiscal quarter for which such installment would otherwise
be due, of the following conditions:
(A) JVCO shall be validly existing and in good standing under
the laws of New Brunswick, as indicated by a Certificate of Status from the
Province of New Brunswick;
(B) all regulatory and legal requirements applicable to payment
of such installment shall have been met; and
(C) the other Party shall have contributed each installment of
its capital contribution required to have been contributed by it pursuant to
this Section 3.2(d).
(iii) In exchange for additional capital contributions under this
Section 3.2(d), the Parties shall receive additional Class A Voting Shares in
the amount of X/Y, where X is the amount in Canadian dollars of each individual
capital contribution, and where Y is the fair market value per Class A Voting
Share in Canadian dollars at the time of the contribution as determined in good
faith by the Board of Directors.
(iv) Either Party may notify the other Party within ten (10) Business
Days of receiving notice of a required capital contribution approved by the
Board (an "Installment Notice") of such Party's intention not to pay the
required installment by the date such installment would otherwise be due (a
"Non-Payment Notice"). The Party providing the Non-Payment Notice shall have a
ninety (90) day cure period from the date of the Installment Notice in which to
pay the required installment. If a Party either (i) fails to provide a Non-
Payment Notice and fails to pay the required installment or (ii) provides a Non-
Payment Notice and fails to pay the required installment within ninety (90) days
of the Installment Notice, then such Party shall be deemed in default of its
capital contribution installment requirement (the "Defaulting Party"). If the
other Party has paid its required installment (the "Paying Party"), such Paying
Party shall have the option of also paying the Defaulting Party's installment
whereupon the total number of additional shares of Class A Voting Shares
provided pursuant to Section 3.2(d)(iii) shall be issued to the Paying Party.
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(e) No Further Funding Obligations. Except as provided in this
Section 3.2, neither Party will be obligated to make contributions to the
capital of JVCO, lend any funds, or otherwise advance or contribute any
additional funds to JVCO.
(f) Limitation on Repayment of Capital Contributions. Except for
dividends on Series A Preferred Shares, no interest or dividends will accrue on
any contributions to the capital of JVCO, and no Party will have the right to
withdraw or to be repaid any capital contributed by it or to receive any other
payment in respect of its interest in JVCO, including without limitation as a
result of its withdrawal from JVCO, except as specifically provided in this
Agreement.
3.3 Dividend Policy. The Parties acknowledge and agree that the Business
Plan contemplates the use of retained earnings to fund the growth of the JVCO
Business. JVCO shall have the right, but not the obligation, to pay dividends to
the Parties hereunder subject to approval by the Board.
3.4 Redemption of Series A Preferred Shares. OPTEL shall have the right to
redeem all or any portion of its Series A Preferred Shares, payable by JVCO in
cash based on the initial purchase price per share plus any accumulated
dividends for any shares redeemed, upon the occurrence of any of the following
events:
(a) the sale by RHYTHMS of any equity holdings of OCI (in which event
the Series A Preferred Shares may be redeemed on a pro rata basis with the
percentage sale of OCI equity holdings sold);
(b) the receipt by JVCO of at least twenty-five million U.S. dollars
(US$25,000,000) through an arm's length financing transaction with a Third
Party;
(c) the confirmation by the JVCO Auditor of JVCO achieving positive
EBITDA; or
(d) the third anniversary date of the Effective Date and/or any
subsequent anniversary date thereafter.
ARTICLE IV
MANAGEMENT
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4.1 Board of Directors.
(a) Except as otherwise expressly provided in this Agreement, the
Parties hereby delegate to the Board of Directors of JVCO all power and
authority to manage the business and affairs of JVCO.
(b) JVCO shall be governed by a board of directors (the "Board")
comprised of four directors (the "Directors") with each Party entitled to
nominate two (2) Directors. The initial nominees are set forth on Schedule
4.1(a) to this Agreement. The Parties agree to elect the
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foregoing nominees at any shareholder meeting (or any proposed action by written
consent) for the purpose of electing Directors to the Board.
(c) If the Percentage Shares of the Parties are no longer equal, the
composition and size of the Board will change as follows:
(i) In the event that a Party's Percentage Share equals or
exceeds sixty percent (60%), such Party shall be entitled to nominate one (1)
additional Director for a total of three (3) Directors on the Board representing
such Party. The Parties agree to (i) approve any action necessary to increase to
five (5) the authorized number of Directors on the Board, and (ii) elect the
foregoing additional nominee at any shareholder meeting (or any proposed action
by written consent) for the purpose of electing Directors to the Board.
(ii) In the event that a Party's Percentage Share equals eighty
percent (80%), such Party shall be entitled to nominate two (2) additional
Directors for a total of four (4) Directors on the Board representing such
Party. Accordingly, the other Party with a Percentage Share equal to or below
twenty percent (20%) will only be entitled to nominate a total of one (1)
Director on the Board representing the other Party.
(iii) In the event that a Party's Percentage Share exceeds eighty
percent (80%), such Party shall be entitled to nominate all Directors and the
other Party with a Percentage Share below twenty percent (20%) will no longer be
entitled to nominate any Director on the Board representing the other Party.
(iv) If a Party's Percentage Share is greater than or equal to
sixty percent (60%) but less than or equal to eighty percent (80%), such Party
shall be entitled to representation on the Board in proportion to such Party's
Percentage Share. In order to effectuate such proportionate representation, the
Parties agree to (A) approve any action necessary to increase the authorized
number of Directors on the Board (B) elect the requisite number of nominees in
the manner described herein in order to adjust the Board composition to reflect
the Parties' Percentage Shares.
(d) Subject to the nomination provisions of Sections 4.1(b) and
4.1(c), if a Director dies, resigns, or becomes incapacitated, the Party that
nominated such Director will designate a replacement to serve until the election
of a new Director can be held.
(e) The Chairperson of the Board will serve for a term of one (1)
calendar year and will be designated by RHYTHMS for terms in even numbered years
and by OPTEL for terms in odd years. If a Party's Percentage Share falls below
forty percent (40%), such Party shall lose the right to designate the
Chairperson and the other Party holding a Percentage Share above sixty percent
(60%) will be entitled to designate the Chairperson. The initial Chairperson,
whose term will end December 31, 2000, will be Scott Chandler.
(f) The Board will meet once each quarter (unless different intervals
are designated in writing by the Board). Meetings may also be called for any
purpose by the Chairperson forthwith upon receipt of a written request from a
Director or the President. Board meetings may be held by telephone. Written
notice of the time, place and purpose of any meeting of the Board will be given
by the Chairperson to each Director at least ten (10) Business
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Days prior to such meeting unless a shorter period of written notice is agreed
in writing to by all Directors. Each Director will be informed in writing not
less than five (5) Business Days in advance of any meeting of the agenda or
matters to be presented to the meeting; provided, however, that in the case of
emergency matters regarding JVCO or its business, the Chairperson and the
President may call a meeting of the Board by sending a written notice containing
the reason for such meeting to each Director at least forty eight (48) hours
prior to such meeting. Any matter, whether or not on the agenda may be raised at
any meeting at which all four (4) Directors are present, provided that if any
Director objects to discussion of a matter not on the agenda, that matter will
not be discussed until the next meeting with respect to which such matter
appears on the agenda. Minutes of the Board meetings will be recorded. These
minutes will be circulated to each Director for approval as soon as practicable
following the relevant Board meeting. Upon adoption, the minutes will be signed
in counterparts by each member and filed at JVCO's principal office.
4.2 Officers.
(a) Directions from the Board will be executed through the President.
The President will be responsible for the management of the day-to-day
operations of JVCO in accordance with the Business Plan and Operating Plan and
will have such other powers and duties as may be assigned by the Board from time
to time. The President's salary, benefits, and expenses will be funded by JVCO.
The President will report directly to the Board and will be an ex officio member
of the Board without voting privileges. Without limiting the foregoing, the
President will have the duty and power to:
(i) retain, hire, and terminate all permanent and temporary
employees of JVCO;
(ii) supervise and review the performance of all employees of
JVCO and to direct their efforts in accordance with this Agreement, the Business
Plan and Operating Plan, and any other direction from the Board;
(iii) oversee and implement the preparation of the Business Plan
and Operating Plan, and participate in the preparation of the Annual Budgets,
Quarterly Outlooks and related financial reports; and
(iv) approve any payment or other disbursement of funds on
behalf of JVCO in amounts up to US$10,000 as well as such larger amounts up to
US$250,000 for specific expenditures contained in the current Annual Budgets as
approved by the Board.
(b) The President may be terminated or removed from performing any
and all duties for JVCO, including, without limitation, managing the day-to-day
operations of the same, upon the affirmative vote of any two Directors of the
Board.
4.3 Authority of the Board and Officers.
(a) JVCO's business and affairs will be managed by or under the
direction of the Board in accordance with the Business Plan, Operating Plan and
Annual Budgets.
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(b) Except as otherwise provided in this Agreement, any action to be
taken by the Board will require a majority vote of the total number of
Directors. Each Director shall be entitled to one (1) vote on each issue before
the Board. A majority of the total number of Directors will constitute a quorum
of the Board, provided, however, that at least one Director representing each of
the Parties must be present for a quorum to exist. No action may be taken by the
Board unless a quorum is present, provided, however, in no event will any
Unanimous Decision be adopted by the Board if less than all of the Directors are
in attendance or consent in writing to such Unanimous Decision. No individual
Party will have the authority to act for, or to assume any obligation or
responsibility on behalf of the other Party or JVCO unless, and then only to the
extent, authorized to do so by the Board in writing or by further written
agreement between the Parties.
(c) So long as each Party has a Percentage Share of at least forty
percent (40%), all Unanimous Decisions and Majority Decisions by or on behalf of
JVCO will be made by the Board acting by the unanimous consent of all Directors.
In the event that a Party's Percentage Share exceeds sixty percent (60%), all
Majority Decisions will be made by the Board acting by the simple majority
consent of Directors. In the event that a Party's Percentage Share exceeds
eighty percent (80%), all Unanimous Decisions and Majority Decisions will be
made by the Board acting by the simple majority consent of Directors.
(d) As used in this Agreement, and subject to Section 4.3(c), the
term "Unanimous Decisions" will include:
(i) approval of the addition of a new Person as a Party to
this Agreement and determination of the terms and conditions pursuant to which
such Person will be added whether as a result of (A) a transfer and sale of a
Party's interest in accordance with Section 7.1(d); or (B) a request to admit an
additional Party pursuant to Section 7.3;
(ii) a decision as to whether to effect a dissolution of JVCO;
(iii) amendments to the Articles of Incorporation or Bylaws of
JVCO;
(iv) approval of a change in the capital structure of JVCO;
(v) approval of the payment of dividends or distributions on
the equity securities of JVCO in accordance with the Articles of Incorporation
and as specified in the Articles of Amendment for the Series A Preferred Shares;
(vi) approval of a high-yield debt offering or initial public
offering of JVCO equity securities, including the timing, nature, and investment
bank selection;
(vii) execution or amendment of any material agreement (other
than the execution of this Agreement and the Ancillary Agreements referred to in
Schedule 1.3) between JVCO and any Party (or any of its Affiliates);
(viii) approval of a change of the location of JVCO's principal
place of business;
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(ix) approval of all additional capital contributions whether
or not reflected in the Business Plan and/or Operating Plan;
(x) establishment of reasonable funded reserves to provide
for payment of any JVCO operating expenses, debt payments, and capital
expenditures;
(xi) approval of all material activities of JVCO not in the
ordinary course of business, including, without limitation, (A) the disposition
of all or substantially all of JVCO's assets or other business interests; (B)
any acquisition or divestiture by JVCO of any interest in a business entity and
the merger of JVCO with any other entity; (C) the borrowing of funds or
incurring of other liabilities not in the ordinary course of business by JVCO;
(D) the creation of any mortgage, security interest, lien or other encumbrance
on JVCO property; and (E) the making by JVCO of any loans, granting any credit,
entering into any guaranties or giving any indemnities;
(xii) appointment of the President and any other senior
officers of JVCO;
(xiii) appointment of the Independent Appraiser;
(xiv) determination of the (A) date by which the Fair Market
Value will be determined; and (B) assumptions, if any, to be provided to and
used by the Independent Appraiser;
(xv) determination of the number of additional Class A Voting
Shares received by the Parties in exchange for capital contributions in
accordance with Section 3.2(d)(iii);
(xvi) review and approval of each business case for a proposed
new Data Product and/or Data Service to be offered by JVCO; the business case
will include, without limitation, an assessment by OPTEL of the feasibility of
offering the proposed new Data Products and/or Data Services utilizing the
existing Underlying Network Facilities architecture within each of the JVCO
Communications Markets. Such business cases may be presented to the Board
individually or as part of a proposed Business Plan;
(xvii) approval of the addition and/or removal of a JVCO
Communications Market from Schedule 1.42;
(xviii) approval of the addition of residential customers as JVCO
Customers;
(xix) approval of any individual expenditure in excess of
US$250,000 regardless of its inclusion in any Annual Budget; and
(xx) adjustment of the amount of individual expenditures
subject to approval by Majority Decision in accordance with Section 4.3(e)(i).
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(e) As used in this Agreement, and subject to Section 4.3(c), the
term "Majority Decisions" will include:
(i) approval of any individual expenditure of more than
US$10,000 which is not included in the Annual Budget, provided that the Board
will use its best efforts to incorporate into the Annual Budgets, each
individual expenditure over US$10,000. The Board has the authority by Unanimous
Decision to raise or lower the amounts subject to its approval. In the event the
Board receives information from the President that a revenue assumption or any
other financial assumption contained in a Business Plan, Operating Plan or
Annual Budget will not occur, the Board will have the right to withdraw its
approval of any individual expenditure which was approved in reliance on such
assumption. Notwithstanding the foregoing, the Board must approve by Unanimous
Decision each individual expenditure in excess of US$250,000 regardless of its
inclusion in any Annual Budget;
(ii) approval of all Business Plans, Operating Plans, Annual
Budgets, Quarterly Outlooks, and Human Resources Plans, including any additional
capital contributions reflected therein, as well as any revisions to approved
Business Plans, Operating Plans, Annual Budgets, Quarterly Outlooks, and Human
Resources Plans; provided, however, that with regard to a Party's Outsourcing
Proposal, a price overrun of twenty percent (20%) or less than the price
reflected in such Party's Outsourcing Proposal will not be considered a revision
to the Annual Budget;
(iii) approval of all material contracts of JVCO including those
involving (A) nonstandard terms and conditions and sales revenue to JVCO or
obligations of JVCO in excess of US$100,000; and (B) standard terms and
conditions and sales revenue to JVCO or obligations of JVCO in excess of
US$500,000;
(iv) approval of the adoption or change of any significant tax
and accounting policies or elections;
(v) approval of any action to be taken in response to a
communication received by the JVCO Auditor not in the ordinary course of
business;
(vi) approval of the purchase, lease or other acquisition of
any real property interests;
(vii) approval of material decisions with respect to any
judicial, administrative, or other proceeding by or against JVCO or referencing
the JVCO name;
(viii) approval of the selection, use, licensing and sale of any
and all JVCO trade marks, trade names and service marks;
(ix) approval of the appointments and changes of JVCO's outside
accountants (the "JVCO Auditor"), attorneys and other professional advisors;
(x) selection of all vendors to provide material outsourced
services to JVCO and determination of whether to engage in a competitive bid
process for the selection of such vendors in accordance with Section 5.2(e);
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(xi) determination of whether a JVCO function, other than those
being provided by each of the Parties, will be performed through outsourced
services; and
(xii) selection of the vendor to provide any outsourced services
to JVCO, including, without limitation, choosing between substantially
competitive bids submitted by two or more Parties and/or Affiliates.
4.4 Provisions for Dealing with Board Deadlock. In the event that the
Board shall fail to reach agreement on any material matter before it after
deliberating upon such matter at any properly constituted Board meeting (such
failure to be hereinafter referred to as a "Deadlock"), any Director may, upon
simultaneous notice to the Parties and the other Directors, refer such matter to
the Parties for resolution by them. Such Director's notice shall be accompanied
by a memorandum or other form of statement setting out such Director's position
on the matter in dispute and such Director's recommendation. The other Directors
may also prepare and distribute memoranda or other forms of statement. If a
dispute is so referred to them, the Parties shall, within ten (10) Business Days
from the date of such notice, confer in good faith with a view toward resolving
such matter and, if it is appropriate, shall cause the Directors to take such
action as is necessary to resolve such matter in the manner agreed by the
Parties. The failure to resolve an issue under this Section by referral to
senior management of the Parties shall specifically not create any right to
utilize the arbitration procedures in Section 10.10.
4.5 JVCO Plans and Budgets.
(a) Business Plans and Operating Plans. The Board will cause to be
prepared annually a five year business plan ("Business Plan") which will include
an analysis of all strategic development and marketing plans for JVCO,
including, without limitation, JVCO's network deployment plan, as well as an
operating plan for a two-year period describing the manner in which JVCO will
implement such Business Plan (the "Operating Plan"). OPTEL agrees to submit for
inclusion in the Business Plan a description of its five-year plan, including,
without limitation, projected milestones, for constructing or deploying
Underlying Network Facilities within each of the JVCO Communications Markets.
The initial Business Plan, together with the supporting financial information,
is attached hereto as Schedule 4.5(a), and the Parties recognize that such
financial information is subject to further review and approval by the Board.
(b) Budgets and Forecasts.
(i) Operating Budget and Capital Budget. The Board will cause
to be prepared an annual operating budget ("Operating Budget") and an annual
capital expenditures budget ("Capital Budget") (collectively, the "Annual
Budgets") for each fiscal year of JVCO, commencing with the fiscal year ending
December 31, 2000, on or before ninety (90) days prior to the commencement of
such fiscal year. The Board will review the Annual Budgets which will not be
effective until unanimously approved by the Board. Should the Board be unable to
agree on the Annual Budgets for any fiscal year, the Annual Budgets for the
preceding fiscal year will remain in effect for a maximum of ninety (90) days at
a level not less than one hundred percent (100%) of each of the Annual Budgets
for the prior fiscal year, during which time the Board will use all reasonable
efforts to agree upon the Annual Budgets for the period in question. The initial
Annual Budgets for the Fiscal Year ending December 31, 2000 will be
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prepared no later than forty-five (45) days after the Effective Date and
submitted to the Board for its consideration. The Operating Budget will set
forth in reasonable detail (a) the authorized expenses on a quarterly basis of
each functional area of JVCO, (b) estimated revenue by product and distribution
channel on a quarterly basis, (c) a projected profit and loss statement for the
fiscal year on a quarterly basis, (d) a projected balance sheet as of each
quarter of each fiscal year, (e) a schedule of projected cash flow, including
estimated Party and capital contributions for each quarter of each fiscal year
and (f) any other information any member of the Board may reasonably request.
The Capital Budget will set forth and itemize in reasonable detail amounts to be
committed or expended on a quarterly basis for equipment, leasehold improvements
and other capitalized items and any other items as any member of the Board may
reasonably request.
(ii) Quarterly Outlook. The Board will cause to be prepared a
quarterly forecast in such detail and for such periods as the Board may
reasonably request (a "Quarterly Outlook") to be prepared at least thirty (30)
days prior to commencement of the applicable fiscal quarter. The Board will
review the Quarterly Outlooks which will not be effective until unanimously
approved by the Board. All cash required to be contributed by the Parties to
JVCO in the next succeeding calendar quarter will be reflected in the Quarterly
Outlook.
4.6 Accounting and Internal Controls.
(a) JVCO will conduct its business at all times in accordance with
high standards of business ethics and maintain JVCO's accounts in accordance
with generally accepted accounting principles consistently applied and
specifically, will:
(i) maintain full and accurate books, records, and accounts
which will, in reasonable detail, accurately and fairly reflect all transactions
of JVCO; and
(ii) devise and maintain a system of internal accounting
controls sufficient to provide reasonable assurances that (A) transactions are
executed in accordance with general or specific authorizations, and (B)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and all
tax information returns, and to maintain accountability for assets.
(b) JVCO books will be kept on the accrual method of accounting, and
will be closed and balanced at the end of each fiscal year. JVCO's books,
records and accounts shall be audited annually by such independent certified
public accountant as may be selected by the Board from time to time. The Board
will make such tax elections as may be necessary or desirable and will direct
JVCO's tax advisor to file them accordingly. The Board will cause the timely
preparation and filing of all required federal and provincial income tax
returns. Unless otherwise agreed in writing by the Parties, the Board will use
reasonable efforts to submit any tax filing to each Party for review and
approval at least thirty (30) days prior to its due date plus all extensions.
The Board will also provide to each Party all JVCO information necessary to
prepare the Party's tax return. This information will be furnished to the
Parties by the original due date of JVCO's tax return (including all extensions)
unless otherwise agreed to in writing by the Parties.
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4.7 Access to Books and Records. JVCO will permit each Party or its
authorized representative to visit and inspect the properties of JVCO, including
its corporate and financial records, during normal business hours following
reasonable notice and as often as may be reasonably requested.
ARTICLE V
CONTRIBUTED RESOURCES
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5.1 Seconded Employees.
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(a) The Parties intend that JVCO initially operate with a minimal
number of employees hired by JVCO. In lieu of hiring employees by JVCO , the
Parties shall make certain of their own employees available to JVCO on a
temporary or secondment basis (the "Seconded Employees") in accordance with the
Human Resources Plan attached hereto as Schedule 5.1(a).
(b) Each calendar quarter (as soon as practicable but in no event
later than thirty (30) days after the end of such quarter), JVCO will reimburse
each Party that provided Seconded Employees for the actual salary of each of its
Seconded Employees plus all costs related to attendant benefit and overhead
allocations and all other expenses directly incurred by the Party for each
Seconded Employee. Seconded Employees will not be eligible for incentive or
performance bonuses specific to the Party or Affiliate from which they were
seconded after the date of secondment, but will be eligible for a JVCO incentive
or performance bonus of up to forty percent (40%) of his or her base salary.
Notwithstanding the foregoing, the Parties acknowledge that it is their
intention that as JVCO implements the Business Plan, JVCO will hire permanent
employees as is reasonable under the circumstances.
(c) All tangible and intangible work product including, without
limitation, inventions (whether or not patentable), works of authorship,
computer programs, trade secrets, proprietary information, algorithms, patents,
copyrights, and other technology, information, and intellectual property of
Seconded Employees in the course of their services to JVCO will be owned solely
by JVCO and will be deemed to be Confidential Information of JVCO. Each Party
providing Seconded Employees (i) will make any assignments necessary to
accomplish the foregoing and (ii) represents that it has appropriate agreements
with its Seconded Employees to ensure that it is entitled to make such
assignments.
(d) JVCO, or its successor, shall have the right to offer permanent
employment to all Seconded Employees with the prior written consent of the Party
which employs such Seconded Employee.
(e) At such time as an employment opportunity arises within JVCO,
each of the Parties will be provided with a written description of the vacant
position. The job description will at a minimum identify the responsibilities of
the position as well as any required skills and qualifications. A Party will
have two (2) weeks from receipt of each job description to provide the President
with a list of all interested employees interested in the subject position.
Nothing in this Section 5.1(e) will preclude JVCO from conducting a search for
candidates external to the Parties subsequent to giving the Parties notice of
the vacant position.
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(f) A Party will provide JVCO with written notice of its intent to
remove a Seconded Employee from JVCO ninety (90) days prior to the date of such
removal and will not remove such Seconded Employee until the expiration of such
notice without the consent of the other Parties.
5.2 Outsourced Services. Certain functions of the JVCO Business will be
outsourced by JVCO for performance by the Parties or their Affiliates as
follows:
(a) RHYTHMS will provide to JVCO at its Direct Cost, any and all of
the following functions as outsourced services (collectively, the "Rhythms
Outsourced Services"):
(i) marketing functions related to JVCO's offering of Data
Products and Data Services, including, without limitation, product development,
product management, vendor relations, direct sales of U.S. ISPs/carriers by
RHYTHMS' U.S. Affiliates, indirect sales of U.S. ISPs/carriers, channel support,
market communications, and brand advertising;
(ii) operational functions related to JVCO's provision and
maintenance of Data Products and Data Services, including, without limitation,
ordering, planning/design of capacity management, providing customer support
services, vendor relations relating to network equipment, and technical support;
(iii) logistical functions related to JVCO's procurement of
Customer Premises Equipment and Data Network Equipment to be used in its
provision of Data Products and Data Services including supply, installation and
maintenance; and
(iv) Data Products and Services Support Center.
(b) OPTEL will provide to JVCO, at its Direct Cost, any and all of
the following functions as outsourced services (collectively, the "Optel
Outsourced Services"):
(i) Network Operations Support Center for Underlying Network
Facilities (specifically, the unbundled local loops);
(ii) Underlying Network Facilities planning, engineering,
installation and maintenance (specifically, the ordering of unbundled local
loops, collocation space, and DS-3 connectivity);
(iii) power, space and communications for OPTEL-owned Data
Network Equipment to be leased to JVCO and located in ILEC central offices for
each of the JVCO Communications Markets; and
(iv) where available, office space and attendant support for
all individuals who will be located in each of the particular JVCO
Communications Markets for the purposes of staffing JVCO's business activities
which will be charged at direct cost.
(c) Within sixty (60) days from the Effective Date, the Board will
determine which Parties will perform the necessary administrative functions
related to JVCO's marketing, offering and maintenance of Data Products and Data
Services, including, without limitation,
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invoicing, collections, cash management, payroll, accounting and taxes. Each of
the Parties will submit to the Board:
(i) within ten (10) Business Days of the Effective Date,
written notice informing the Board whether or not the Party is interested in
performing such functions; and
(ii) subject to a Party having informed the Board of its
interests by complying with Section 5.2(d) below within thirty (30) days of the
Effective Date, an Outsourcing Proposal for such administrative functions as
well as such other information as the Board may reasonably request to assist in
making this decision.
In its review of the foregoing information, the Board will take into
consideration those factors described in Section 5.2(e) below. Each Party agrees
to reasonably cooperate with the Board to achieve the purposes of this Section
5.2(c).
(d) Each Party will submit annually, for inclusion in the Annual
Budgets, a proposal detailing the functions that it will perform on behalf of
JVCO during the ensuing year as well as the projected costs to be charged to
JVCO for such functions (each proposal, an "Outsourcing Proposal"). Further, in
the event JVCO requests a change in the scope of work pursuant to the
Outsourcing Proposal, the affected Party will submit a proposal of the projected
costs, if any, associated with such change ("Change Order Proposal") for
appropriate review and approval by JVCO. To the extent that the actual costs
charged by a Party to JVCO exceed twenty percent (20%) of the estimated cost
originally contained in such Party's Outsourcing Proposal and/or Change Order
Proposal, the Board will decide by Unanimous Decision whether such cost overrun
will be paid by JVCO.
(e) The Board may determine by a Unanimous Decision that certain
functions of the JVCO Business other than those described in either Section
5.2(a) or Section 5.2(b) may be outsourced to Third Parties. In making a
determination regarding the appropriate Third Party vendor to provide a function
to be outsourced, the Board may entertain an offer by one or more of the Parties
(or their Affiliates) to provide such functions; provided, however, the Board
may solicit a Third Party vendor to provide any such services pursuant to a
competitive bid process following the following guidelines:
(i) Any Party (or any of its Affiliates) will be afforded
ample opportunity to submit a bid;
(ii) If a Party (or any of its Affiliates) submits a bid that
is substantially competitive with the best bid the Board receives from a Third
Party, then, in making its selection, the Board will prefer the bid of such
Party or Affiliates to that of any Third Party vendor. Whether a bid of a Party
or Affiliate is substantially competitive will be decided by a Unanimous
Decision of the Board. In making this decision, the Board will take into
consideration the following factors (which are not listed in order of
importance):
(A) the nature and experience of the bidder in providing
the service in question or in providing like services to the service in
question;
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(B) the specifications of the service offered by the
bidder (including but not limited to any special terms, the specified technical
support, the time of performance and the level of resources to be dedicated to
the service);
(C) the response time and contingency facilities and
arrangements offered by the bidder to address routine and extraordinary
problems;
(D) any cost savings to JVCO as a result of the
particular specifications offered by the bidder in question; and
(E) the price for the service, provided, however, that a
bid which is no more than 5% higher in price will be deemed substantially
competitive if all other relevant factors are deemed equal;
(iii) In the event two or more Parties and/or Affiliates submit
bids that are substantially competitive, the Board will use the same factors in
Section 5.2(e)(ii) above to determine by Unanimous Decision which of these bids
is more substantially competitive than the other(s) and, further, will award the
bid to such Party or Affiliate having the most substantially competitive bid;
and
(iv) In the event that a Party's (or any of its Affiliates')
bid is not substantially competitive with the best bid the Board receives from a
Third Party, such Party or Affiliate will be entitled to modify its bid to make
it substantially competitive with the best bid submitted by a Third Party
vendor.
5.3 Optel Leased Assets.
(a) The Parties acknowledge that, due to the initial fifty percent
(50%) ownership of JVCO by a non-Canadian entity, the Telecommunications Act of
Canada will not permit JVCO to qualify as a Canadian Carrier or to own, lease or
operate certain telecommunications assets ("Canadian Carrier Telecommunications
Assets"). OPTEL shall provide JVCO with long-term lease arrangements, providing
access to and use of any and all Canadian Carrier Telecommunications Assets
necessary for the conduct of JVCO Business. OPTEL shall propose, for approval by
the Board, lease arrangements, on commercially reasonable terms, for Canadian
Carrier Telecommunications Assets that will be owned and operated by OPTEL and
purchased expressly for the use of JVCO as set forth on Schedule 5.3(a) (the
"Optel Leased Assets"). Such lease arrangements shall provide terms describing
the assets provided by OPTEL, the services provided by OPTEL to operate the
assets, the lease payment terms from JVCO to OPTEL, and any financing guarantee
obligations of JVCO or the Parties as a condition of any Third Party financing
required for OPTEL to purchase or lease the Optel Leased Assets. RHYTHMS hereby
acknowledges and agrees that RHYTHMS will guarantee one half of any obligation
that JVCO has to OPTEL with respect to the financing of any Optel Leased Assets.
(b) For any telecommunications equipment or property provided by
RHYTHMS to OPTEL or JVCO, RHYTHMS agrees to provide such telecommunication
equipment or property at Direct Cost.
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(c) In the event that the Telecommunications Act of Canada is amended
or the percentage ownership of JVCO changes to permit JVCO to own Canadian
Carrier Telecommunications Assets, JVCO shall have the option to purchase the
Optel Leased Assets that OPTEL had previously provided to JVCO pursuant to
Section 5.3(a) above. JVCO shall have the right to (i) purchase the Optel Leased
Assets at book value, and/or (ii) in the case of assets subject to lease
agreements entered into by OPTEL on behalf of JVCO, assume the lease obligations
for the Optel Leased Assets at Direct Cost.
(d) Within one hundred twenty (120) days of becoming eligible to own
Canadian Carrier Telecommunications Assets, JVCO will notify OPTEL of its
intention to purchase the Optel Leased Assets. Once JVCO notifies OPTEL of such
intention, JVCO and OPTEL shall have one hundred twenty (120) days to complete
the purchase of Optel Leased Assets by JVCO.
5.4 Trademark Licenses.
(a) The Data Products and Data Services will be offered by JVCO using
the "Rhythms" service mark.
(b) RHYTHMS shall grant to JVCO a non-exclusive license for the use
of RHYTHMS trade/service marks and trade names in the JVCO Business under the
terms of a license agreement in substantially the form attached hereto as
Schedule D.
5.5 Technology Licenses. The Parties shall negotiate in good faith and
enter into technology licensing agreements between (a) RHYTHMS and JVCO, and (b)
OPTEL and JVCO in substantially the form attached hereto as Schedule E.
5.6 Non-Competition; Other Businesses.
(a) JVCO Customers. Except as otherwise provided in this Agreement,
the Parties intend that JVCO will have the exclusive right to market and provide
the Data Products and Data Services to JVCO Customers within the JVCO
Communications Markets. Except as otherwise provided in this Agreement, the
Parties and their Affiliates will not engage in or benefit from, directly or
indirectly, the marketing and providing of any Data Products or Data Services,
as identified in Schedule 1.25, to JVCO Customers in any JVCO Communications
Markets throughout the term of this Agreement. Unless the Parties mutually agree
in writing to the contrary or except as provided in this Agreement: (i) all Data
Products and Data Services will be provided to JVCO Customers in JVCO
Communications Markets as products and services of JVCO; (ii) no Party will
engage in any solicitation of JVCO Customers for Data Products or Data Services;
and (iii) JVCO will not market directly to non-JVCO Customers.
(b) Non-JVCO Customers. The Parties intend that JVCO will be the
supplier of choice for RHYTHMS and OPTEL for marketing and providing the Data
Products and Data Services (except in the case of OPTEL, Voice Services) to all
other customers within the JVCO Communications Markets that are not JVCO
Customers. JVCO shall have the right of first refusal to supply Data Products
and Data Services to RHYTHMS or OPTEL for such non-JVCO Customers.
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(i) Proposed Non-JVCO Customers. The Party planning to provide
Data Products or Data Services to non-JVCO customers within the JVCO
Communications Markets shall send written notification to the President of JVCO
specifying the customer and the customer's requirements for Data Products and/or
Data Services (the "Customer Requirement Notice"). Within three (3) Business
Days of receipt of a Customer Requirement Notice, the President shall notify the
Party submitting such Customer Requirement Notice of the decision of JVCO to
elect to either accept or decline the opportunity of providing Data Products
and/or Data Services under the terms of the Customer Requirement Notice. If JVCO
elects to decline such opportunity, the Party may submit the Customer
Requirement Notice (under the same terms submitted to JVCO) to an alternate
supplier or suppliers of data products and services, with a copy provided to the
President of JVCO.
(ii) Existing Non-JVCO Customers. If for performance or market
coverage reasons, a Party determines that JVCO is not adequately addressing the
needs of such Party's non-JVCO Customer, such Party shall send written
notification to the President of JVCO specifying the customer and the
modifications in products or services necessary to satisfy such non-JVCO
customer's requirements for Data Products and/or Data Services (the "Customer
Requirement Modification Notice"). Within three (3) Business Days of receipt of
a Customer Requirement Modification Notice, the President shall notify the Party
submitting such Customer Requirement Modification Notice of the decision of JVCO
to elect to either accept or decline the opportunity to continue providing Data
Products and/or Data Services under the terms of the Customer Requirement
Modification Notice. If JVCO elects to decline such opportunity, the Party may
submit a revised Customer Requirement Notification (under the same terms of the
Customer Requirement Modification Notice submitted to JVCO) to an alternate
supplier or suppliers of data products and services, with a copy provided to the
President of JVCO.
(iii) A Party shall be permitted to provide the data products
and services of an alternate supplier to non-JVCO Customers pursuant to
subsections 5.6(b)(i) and 5.6(b)(ii), above, notwithstanding the intention of
the Parties that JVCO be the supplier of choice as provided in Section 5.6(b).
(c) Optel Customers. OPTEL intends to use JVCO Data Products and Data
Services (excluding Voice Services) when marketing to (i) Small and Medium
Business Customers, (ii) Pre-Existing Optel Customers, and (iii) Optel Combined
Service Customers (collectively, the "Optel Customer Base"). If for performance
or market coverage reasons, the Parties determine that OPTEL is not adequately
addressing the needs of customers in the Optel Customer Base, JVCO may amend its
Business Plan to provide JVCO Data Products and Data Services directly to
customers in the Optel Customer Base.
(d) Joint Marketing to Rhythms Customers. The Parties intend that
JVCO may engage in certain joint marketing efforts with RHYTHMS to target
existing customers of RHYTHMS as set forth on Schedule 1.43 which have
facilities located in each of the JVCO Communications Markets.
(e) Voice Services. In the event that JVCO determines to provide
Voice Services to JVCO Customers, the Parties intend that JVCO will contract
with OPTEL to supply the necessary switched services required to provide Voice
Services and that OPTEL will supply
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such switched services on a basis that is substantially competitive with other
Third Party providers.
(f) Transfer Pricing. For the two (2) year period following the
----------------
effective Date, JVCO shall supply RHYTHMS and OPTEL with Data Products and Data
Services for provision to the respective customers of RHYTHMS and OPTEL in the
JVCO Communications Markets at prices and terms no less favorable than those
prices and terms for similar Data Products and Data Services provided or offered
by JVCO to any other JVCO Customer (based on similar scope, volume and customer
requirements) ("Transfer Pricing"). Upon the second anniversary of the Effective
Date and each year thereafter, the Parties agree to review the current Transfer
Pricing, with the intention of implementing a pricing system to RHYTHMS and
OPTEL based on incremental cost. Incremental cost includes variable or direct
costs (included in the Business Plan as variable cost of sales), plus the
average semi-variable cost per line item (including the fixed cost of sales and
operating costs) calculated over the subsequent twelve (12)-month period across
all Canadian communications markets, in accordance with the approved Annual
Budget. If the calculated amount of incremental cost exceeds the current
Transfer Pricing, incremental cost-based pricing to RHYTHMS and/or OPTEL will
not be implemented for that twelve (12)-month period.
(g) Non-Competition Following Withdrawal from JVCO. Except as
----------------------------------------------
provided in Sections 5.6(b) and 5.6(c), no Party will represent, establish or
maintain an independent or separate visibility or presence in the JVCO
Communications Markets with regard to any of the Data Products or Data Services.
The Parties further agree that upon a Party's withdrawal from or transfer of its
entire interest in JVCO, for any reason (except for an Event of Withdrawal),
such Party and its Affiliates will not engage in or benefit from, directly or
indirectly, the marketing and providing of any Data Products or Data Services to
JVCO Customers in any JVCO Communications Market for a period of one (1) year
from the effective date of such withdrawal or transfer; provided, however, that
-------- -------
this non-compete obligation will be limited to those (A) Data Products and Data
Services being provided by JVCO to JVCO Customers, (B) within the JVCO
Communications Markets, and (C) in the case of withdrawal by RHYTHMS, to
customers that are in the Optel Customer Base, as of effective date of such
withdrawal or transfer. Nothing in this Section 5.6(g) will be deemed to
prohibit either Party from engaging in or benefiting from, directly or
indirectly, the marketing and providing of: (i) other products or services that
are not Data Products and Data Services; (ii) Data Products and Data Services to
customers that are not JVCO Customers; or (iii) Data Products and Data Services
outside of the geographic areas defined as the JVCO Communications Markets in
this Agreement. In the event that OPTEL withdraws from JVCO for any reason
whatsoever, JVCO shall not directly engage in or benefit from the marketing and
providing of any Data Products or Data Services to the Optel Customer Base for a
period of one (1) year from the effective date of OPTEL's withdrawal
(h) New Business Proposals. Each Party shall bring to the Board for
----------------------
its review business cases for proposed new Data Products and/or Data Services
(except in the case of OPTEL, Voice Services) ("New Business Opportunity") to be
provided by JVCO either through internal development or acquisition. In the
event the Board reviews a New Business Opportunity to be offered by JVCO and
fails to approve such New Business Opportunity by Unanimous Decision, the
Parties agree that the Party presenting the New Business Opportunity to the
Board shall be permitted to pursue such New Business Opportunity (except that if
such
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New Business Opportunity involves the acquisition of a DSL business, then
neither Party shall be permitted to pursue such New Business Opportunity) while
the other Party will be prohibited from pursuing such New Business Opportunity
in any JVCO Communications Markets for a period of six (6) months from the date
the Board makes such determination. Any and all information provided by a Party
in connection with a New Business Opportunity will be deemed to be Confidential
Information of such Disclosing Party and will be subject to the confidentiality
provisions set forth in Article VI of this Agreement. Notwithstanding the
foregoing, any offering of a New Business Opportunity will be subject to the
following conditions:
(i) OPTEL and its Affiliates will not in any manner use any of the
trade/service marks or trade names owned by RHYTHMS including, without
limitation, the "Rhythms" brand name, in connection with such offering; and
(ii) notwithstanding anything to the contrary in this Section 5.6(h),
it is understood that the Parties and their Affiliates are and will be engaged
in other separate activities and businesses in and outside of the JVCO
Communications Markets that may not be directly related to the JVCO Business
(the "Independent Businesses"), and except to the extent otherwise agreed to,
the Parties and their Affiliates will be required to devote only so much time as
each in its sole discretion may deem necessary as shareholders of JVCO.
(i) Independent Businesses. Except as otherwise specifically provided in
----------------------
this Agreement and the Ancillary Agreements, and without affecting either
Party's or its Affiliates' duties to perform its obligations under this
Agreement and the Ancillary Agreements in the best interest of JVCO, nothing
contained in this Agreement and the Ancillary Agreements will be construed as
limiting the right of any Party or its Affiliates to engage in any Independent
Businesses, including (but not limited to) the businesses in which such Party or
its Affiliates are currently engaged or in which any Party or its Affiliates may
hereinafter engage. The Parties hereby acknowledge and agree that the provision
by OPTEL of (i) voice services, including, without limitation, Voice Services,
to any customer and (ii) Data Products and Data Services to non-JVCO customers
shall constitute an Independent Business of OPTEL. For greater certainty and
notwithstanding the foregoing, the Parties acknowledge and agree that the
marketing and provision by OPTEL of voice services, including, without
limitation, Voice Services, to any customer shall not be limited in any way by
any provision of this Agreement. Any benefits or obligations arising from such
Independent Businesses will inure solely to such Party or their Affiliates and
not JVCO or the other Party or their Affiliates; and neither JVCO nor the other
Party will have any rights by virtue of this Agreement to such Independent
Businesses or the income or profits derived therefrom.
5.7 Non-Solicitation of Employees. JVCO will not solicit employees of RHYTHMS
-----------------------------
or OPTEL (and their respective Affiliates), and RHYTHMS and OPTEL (and their
respective Affiliates) will not solicit employees of JVCO or one another without
the prior written consent of the employing party, except for general
solicitation (e.g., newspaper advertisements) not specifically targeted to
employees of the employing party.
5.8 Transition of Business.
----------------------
Upon a Party's withdrawal from or transfer of its entire interest in JVCO
pursuant to either Section 5.6(g), Section 7.2 or Article IX, the Parties agree
to cooperate to ensure an orderly transition of business between JVCO and the
Parties.
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(a) During such transition, the withdrawing Party shall be permitted
wholesale access to the services and assets of JVCO on commercially reasonable
terms, including the use of (i) equipment and real property assets for a period
of twelve (12) months, (ii) intellectual property rights (including
trade/service marks and trade names) and assets for a period of six (6) months,
and (iii) Outsourced Services for a period of twelve (12) months.
(b) The Party withdrawing from or transferring its entire interest in
JVCO shall be required to transfer or sell to JVCO, at Fair Market Value as
determined by the Independent Appraiser, any JVCO Dedicated Assets that had been
provided to JVCO (excluding trade/service marks and trade names) for conducting
the JVCO Business, and provided that any Optel Leased Assets shall be
transferred in accordance with Section 5.3(c).
(c) For a period of one (1) year following the withdrawal, the
withdrawing Party will not solicit employees of JVCO without the written consent
of JVCO.
ARTICLE VI
CONFIDENTIAL INFORMATION
------------------------
6.1 Treatment of Confidential Information.
-------------------------------------
(a) Each of JVCO, the Parties, and the Parties' Affiliates will
hold and maintain in strictest confidence all Confidential Information and
during the period in which the obligations imposed by the Article VI are in
effect, and, except as otherwise provided in Section 6.5, the Receiving Party
will not disclose or otherwise communicate such Confidential Information to
others, or use it for any purpose, except for the sole purposes of this
Agreement.
(b) Each member of the Board and all employees of JVCO, seconded
or otherwise, will sign a proprietary information and inventions agreement
substantially in the form of that reflected in Exhibit C to this Agreement.
---------
(c) Except as otherwise provided in Section 6.5, each Receiving
Party will not copy Confidential Information unless specifically authorized in
writing by the Disclosing Party and will not make disclosure of any such
Confidential Information to anyone except its employees and Affiliates to whom
disclosure is necessary for the purposes of this Agreement or the business of
JVCO.
(d) Each Party will appropriately notify each of its directors,
officers, employees and Affiliates to whom such disclosure is made that such
disclosure is made in confidence and will be kept in confidence by such Persons.
(e) Notwithstanding the foregoing, each Receiving Party will
protect Confidential Information with the same degree of care that it protects
its own sensitive information of a similar nature, but in any event will
exercise reasonable efforts, consistent with the nature of each particular piece
of Confidential Information, to protect it from unauthorized disclosure.
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6.2 Copying Confidential Information. In the event that any copies of
--------------------------------
Confidential Information that bears a confidential, proprietary, or similar
notice or legend (a "Confidentiality Legend") are made, each such copy will
contain and state the same Confidentiality Legend, if any, which appear on the
original.
6.3 Time Period. Confidential Information will he deemed a valuable trade
-----------
secret of a Disclosing Party, and each Receiving Party will hold such
Confidential Information in confidence for the greater of (i) the term of this
Agreement or (ii) a period of three (3) years from the date of receipt of same,
unless otherwise agreed to in writing by the Disclosing Party. Upon expiration
of the applicable time period, all Confidential Information together with any
copies of same, will be returned or certified destroyed by the Receiving Party
to the Disclosing Party. The requirements of use and confidentially set forth
herein will survive after termination and after return of such Confidential
information.
6.4 Remedies. The Parties acknowledge that the unauthorized disclosure or
--------
use of any Confidential Information could cause irreparable harm and significant
injury, the extent and consequence of which may be difficult to assess.
Therefore, the Parties agree that if a Party believes its Confidential
Information may have been disclosed contrary to this Article VI, that in
addition to any other remedies in law or equity available to the aggrieved
Party, such Party will be entitled to immediate injunctive relief.
6.5 Confidential Information of JVCO. Each Party will have the right to
--------------------------------
use Confidential Information owned by JVCO in connection with its or an
Affiliate's business purposes subject to the condition that each Party will
protect such Confidential Information with the same degree of care that it
protects its own sensitive information of a similar nature, but in any event
will exercise reasonable efforts, consistent with the nature of each particular
piece of Confidential Information received from JVCO, to protect it from
unauthorized disclosure. In no event will the Confidential Information owned by
either a Party or an Affiliate of a Party which is provided either to (i) JVCO
for use in connection with its business; or (ii) the Board in connection with a
review or a business case for a proposed new Data Product and/or Data Service,
be deemed to be Confidential Information of JVCO unless and until otherwise
agreed to in writing by the Disclosing Party.
ARTICLE VII
SHARE TRANSFER RESTRICTIONS
---------------------------
7.1 Transfer Restrictions.
---------------------
(a) Except as set forth in this Section 7.1, and subject to
compliance with the other terms of this Agreement, no Party shall sell, assign,
or otherwise transfer any Shares owned by it (each action, a "Share Transfer")
without the prior written consent of the other Party. No Party shall create or
permit to exist any security interest, lien, claim, pledge, option, right of
first refusal, agreement, limitation on the voting rights, charge or other
encumbrance of any nature whatsoever (each action, an "Encumbrance") in respect
of the Shares of JVCO without the prior written consent of the other Party.
Except as otherwise provided herein, no Party shall attempt a Share Transfer or
Encumbrance prior to the fifth anniversary of the Effective Date. Any
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attempted Share Transfer or Encumbrance in violation of this Section 7.1 will be
deemed null and void. Notwithstanding the foregoing, OPTEL shall have the right
to create a security interest in and to pledge any of its Shares to Nortel
Networks Corporation or its affiliates (collectively, "Nortel") in connection
with a proposed credit facility to be provided by Nortel to OPTEL. In the event
of a default by OPTEL under such a credit facility, beneficial ownership of
OPTEL's Shares shall not transfer to Nortel, unless Nortel agrees in writing to
be bound by the terms and conditions of this Agreement.
(b) To the extent allowable under law, a Party may transfer all, but
not less than all, of its Shares in JVCO to an Affiliate provided that such
transferring Party will remain fully responsible for the satisfaction of its
obligations under this Agreement.
(c) The certificates evidencing the Shares shall bear a legend
substantially as set forth below :
THE SHARES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO, AND MAY BE
SOLD, ASSIGNED OR OTHERWISE TRANSFERRED ONLY IN COMPLIANCE WITH, THE
PROVISIONS OF A JOINT VENTURE AGREEMENT DATED AS OF JANUARY 1, 2000
BETWEEN RHYTHMS NETCONNECTIONS INC. AND OPTEL COMMUNICATIONS
CORPORATION, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL EXECUTIVE
OFFICE OF RHYTHMS CANADA IN TORONTO, ONTARIO. ANY TRANSFER THEREOF IN
CONTRAVENTION OF SUCH PROVISIONS SHALL BE VOID AND OF NO EFFECT.
(d) Right of First Offer.
--------------------
(i) General. If, after the fifth anniversary of the Effective
-------
Date, a Party ("Selling Party") proposes a Share Transfer by such Party to a
Third Party (a "Proposed Sale"), the Selling Party must first offer such Shares
to JVCO (the "Right of First Offer") at the same price and on the same other
terms and conditions as the Proposed Sale (except that JVCO exercising its Right
of First Offer shall be entitled to pay cash for the purchase price) in
accordance with this Section 7.1(d):
(A) the consideration for the Proposed Sale shall consist
solely of cash, cash equivalents or marketable securities;
(B) the Selling Party shall deliver an Offering Notice to
JVCO and each of the Parties not less than thirty (30) days prior to each
Proposed Sale, setting forth: (1) the name of the Selling Party and the number
of Shares proposed to be sold; (2) the name and address of the proposed
purchaser; and (3) the proposed per share purchase price (which must be payable
in cash, cash equivalents or marketable securities) and the terms and conditions
of payment offered by such proposed purchaser;
(C) JVCO shall give a Purchase Notice or a Refusal Notice
to the Selling Party and each of the Parties within ten (10) Business Days of
receipt of the Offering Notice; and
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(D) if JVCO declines to purchase all of the Shares in the Proposed
Sale, the Parties shall have a Right of First Offer on such Shares. The Parties
shall give a Purchase Notice or a Refusal Notice to all other Parties within ten
(10) Business Days after receipt of JVCO's Refusal Notice. A Party electing to
purchase any Shares in the Proposed Sale shall be entitled to purchase the
amount of Shares so elected unless the amount elected by all Parties would
exceed the amount of Shares to be sold, in which case it shall be entitled to
purchase the lower of the amount of Shares so elected and a pro rata portion of
the Shares to be sold based on the amount of Shares beneficially owned by it and
its Affiliates and the amount of Shares beneficially owned by each other elected
Party and their Affiliates. Any failure by a party hereto to give a Purchase
Notice or a Refusal Notice in a timely manner is contemplated herein shall have
the same effect as the giving of a Refusal Notice by such party.
(ii) The closing of the purchase of the Shares pursuant to the Right of First
Offer shall take place at the principal executive offices of JVCO on the
thirtieth day after delivery of the Purchase Notice (or upon such other date as
may be mutually agreed) (the "Final Transaction"). At such closing, the Selling
Party will deliver certificates representing the Shares so purchased duly
endorsed against payment therefor.
(iii) In the event that all of the Shares are not sold pursuant to the Right
of First Offer set forth in Section 7.1(d)(i), the Selling Party may sell, at
any time within ninety (90) days from the date of the last Refusal Notice, the
Shares in the Proposed Sale in cash, cash equivalents or marketable securities
at a price per share equal to or greater than and on other terms and conditions
no more favorable to the purchaser than those of the Proposed Sale. As a
condition of the sale of such Shares, the Selling party must first obtain a
written agreement by such purchaser to adhere to this Agreement and/or any other
terms and conditions that are mutually agreed upon by the existing members of
the Board.
(iv) The obligations set forth in this Section 7.1(d) shall not apply to
Share Transfers (A) pursuant or subsequent to an initial public offering, or (B)
that constitute permitted Share Transfers to Affiliates pursuant to Section
7.1(b).
(v) The Selling Party will continue to provide services of the type and
pursuant to the same terms and conditions which it is obligated to provide
pursuant to Section 5.2 of this Agreement until the date of the Final
Transaction which results in the Selling Party's sale of all of its Shares.
Further, notwithstanding consummation of the Final Transaction, at the option of
JVCO, as evidenced by written notice provided within sixty (60) days from the
date of the Offering Notice which contemplates the Final Transaction, the
Selling Party will continue to provide the above described services to JVCO for
a term of not less than two (2) years from the date of the Final Transaction
(the "Transition Term"); provided, however, that in the event JVCO has
commitments to JVCO Customers greater than two (2) years, with respect
specifically to each of said JVCO Customers, the Transition Term will be
commensurate with the term of a particular JVCO Customer's contract with JVCO.
Further, the Parties agree to negotiate the extending of the Transaction Term
for specific situations other than those described herein on a case-by-case
basis.
(vi) Notwithstanding the five (5) year period from the Effective Date during
which a Selling Party is restricted from entertaining a Proposed Sale (the
"Restricted
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Transfer Period"), a Selling Party may entertain a Proposed Sale to sell a
portion of the Selling Party's Shares for the purpose of financing JVCO's
business activities and the Right of First Offer described in this Section
7.1(d) shall apply. In addition to the information described above, the Offering
Notice shall also contain a certification from an officer of the Selling Party
that the purpose for such Proposed Sale is to seek additional parties for
financing assistance. No Selling Party may seek to sell more than twenty percent
(20%) of its Percentage Shares, in the aggregate, during the Restricted Transfer
Period.
(vii) The Right of First Offer set forth in this Section 7.1(d) may not
be assigned or transferred, except that such rights are assignable by each Party
to (A) any Affiliate of such Party, or (B) a party or parties reasonably
acceptable to each of the other Parties.
7.2 Buy-Sell Option.
---------------
(a) Either Party shall have the right to exercise an option to sell all
of its Shares to the other Party or to buy all of the Shares of the other Party
(the "Buy-Sell Option") upon the earlier of:
(i) the fifth anniversary of the Effective Date; or
(ii) the date when the Telecommunications Act of Canada is amended
to permit RHYTHMS to qualify as a Canadian Carrier or to own, lease or operate
Canadian Carrier Telecommunications Assets, but not earlier than the second
anniversary of the Effective Date.
(b) The Party exercising the Buy-Sell Option (the "Exercising Party")
shall provide the other Party (the "Non-Exercising Party") with a notice (the
"Buy-Sell Notice") (i) informing the other Party of the intent to exercise the
Buy-Sell Option, and (ii) designating the price per share of Class A Voting
Shares at which the Exercising Party is offering to either (A) sell all of the
Exercising Party's shares of Class A Voting Shares to the Non-Exercising Party
or (B) purchase all of the Non-Exercising Party's shares of Class A Voting
Shares.
(c) The Non-Exercising Party shall have thirty (30) days from receipt
of the Buy-Sell Notice to elect whether to (i) sell all of such Non-Exercising
Party's shares of Class A Voting Shares to the Exercising Party or (ii) purchase
all of the Exercising Party's shares of Class A Voting Shares. Within thirty
(30) days of the Non-Exercising Party's election, the Parties shall conclude the
transaction to transfer all of the shares of Class A Voting Shares to the Party
designated through the election of the Buy-Sell Option.
(d) In the event that ownership by RHYTHMS of one hundred percent
(100%) of JVCO Class A Voting Shares precludes JVCO from qualifying under the
Telecommunications Act of Canada as a Canadian Carrier or to own or operate
Canadian Carrier Telecommunications Assets and a Party exercises its rights
under Section 7.2(a)(i), RHYTHMS shall be permitted to transfer any shares
purchased from OPTEL to a Third Party or Affiliate of RHYTHMS as permitted under
Canadian law.
7.3 Additional Parties. Additional parties may be added to this Agreement
------------------
but only upon the Unanimous Decision of the Board. Prior to being admitted,
additional partners will
32
<PAGE>
agree in writing to adhere to this Agreement and/or any other terms and
conditions that are mutually agreed upon by the existing members of the Board.
7.4 Event of Withdrawal.
-------------------
(a) When an Event of Withdrawal occurs, the affected Party or
legal representative thereof or successor in interest thereto (the "Successor")
will promptly give notice to JVCO. If such notice is not given within ten (10)
Business Days after the Event of Withdrawal occurs, any Party having a knowledge
of the occurrence may give notice thereof. Unless otherwise provided in the
definition of Event of Withdrawal above, the effective date of withdrawal shall
be the date such notice is given.
(b) When an Event of Withdrawal occurs, the affected Party
("Former Party") shall cease to be a shareholder of JVCO as of the effective
date of withdrawal. Except as otherwise provided by this Agreement, a Successor
shall have no right to become a substitute shareholder of JVCO. Unless and until
a Former Party's interest in JVCO is purchased pursuant to this Article, the
Former Party or Successor shall be entitled to receive the share of JVCO profits
and distributions to which the Former Party or Successor would be entitled to
receive hereunder had no Event of Withdrawal occurred. Except as otherwise
provided herein, neither a Former Party nor a Successor shall have any liability
with respect to obligations incurred by JVCO after the effective date of
withdrawal, or any right to participate in the management of JVCO or the
decisions of the Parties; provided, however, that the Parties may not, without
the express written consent of the Former Party or Successor, take any action
which would change the Former Party's interest in JVCO profits, losses or
distributions, or the time at which distributions are payable if such action
could have required the Former Party's consent if taken prior to the effective
date of withdrawal.
(c) When an Event of Withdrawal occurs, if all Parties elect to
continue the business of JVCO, and JVCO gives notice of such election to the
Former Party or Successor within ninety (90) days after the effective date of
withdrawal, then the business of JVCO shall be continued by the Parties. If the
Parties elect to continue the business of JVCO, JVCO or the Parties shall have
the option to purchase the Former Party's entire JVCO interest as of the
effective date of withdrawal, in the manner and on the terms provided in Section
7.1.
ARTICLE VIII
REPRESENTATIONS AND WARRANTIES
------------------------------
8.1 Mutual Representations and Warranties. Each Party hereby
-------------------------------------
represents and warrants to the other Party as of the Effective Date as follows:
(a) Corporate Existence and Power. Such Party (i) is a
-----------------------------
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction in which it is incorporated, and (ii) has full corporate
power and authority and the legal right to own and operate its property and
assets and to carry on its business as it is now being conducted and as is
contemplated in this Agreement.
33
<PAGE>
(b) Authorization. Such Party (i) has the corporate power and
-------------
authority and the legal right to enter into the Agreement and perform its
obligations hereunder, and (ii) has taken all necessary corporate action on its
part required to authorize the execution and delivery of the Agreement and the
performance of its obligations hereunder. The Agreement has been duly executed
and delivered on behalf of such Party, and constitutes a legal, valid, binding
obligation of such Party and is enforceable against it in accordance with its
terms subject to the effects of bankruptcy, insolvency or other laws of general
application affecting the enforcement of creditor rights and judicial principles
affecting the availability of specific performance and general principles of
equity whether enforceability is considered a proceeding at law or equity.
(c) Absence of Litigation. Such Party is not aware of any pending or
---------------------
threatened litigation (and has not received any communication) which alleges
that such Party's activities related to this Agreement have violated, or that by
conducting the activities as contemplated herein such Party would violate, any
of the intellectual property rights of any other person.
(d) Consents. All necessary consents, approvals and authorizations
--------
of all governmental authorities and other persons or entities required to be
obtained by such Party in connection with the Agreement have been obtained,
except for the final consent required from the senior note holders of OPTEL.
(e) No Conflict. The execution and delivery of the Agreement and the
-----------
performance of such Party's obligations hereunder (i) do not conflict with or
violate any requirement of applicable law or regulation or any provision of the
articles of incorporation or bylaws of such Party in any material way, and (ii)
do not conflict with, violate or breach or constitute a default or require any
consent under, any contractual obligation or court or administrative order by
which such Party is bound.
(f) Intellectual Property. Such Party represents and warrants to the
---------------------
other that, to the best of its knowledge, it has sufficient legal and/or
beneficial title and ownership under its intellectual property rights necessary
for it to fulfill its obligations under this Agreement and that it is not aware
of any communication alleging that it has violated or by conducting its business
as contemplated by this Agreement would violate any of the intellectual property
rights of any other person. As used herein, "intellectual property rights" means
all patent rights, copyrights, trademarks, trade secret rights, and know-how
rights necessary or useful to make, have made, use, offer for sale, sell, have
sold, import and export the Data Products and Data Services.
8.2 Additional Representations, Warranties and Covenants. OPTEL hereby
----------------------------------------------------
represents, warrants and covenants to RHYTHMS as follows:
(a) Authorization as Canadian Carrier. OPTEL is a duly authorized
Canadian carrier and is eligible to operate as a telecommunications common
carrier in Canada, as those terms are defined under and in accordance with the
Telecommunications Act and the Canadian Telecommunications Common Carrier
Ownership and Control Regulations. OPTEL has met all of the requirements imposed
by the Canadian Radio-television and Telecommunications Commission (the "CRTC")
and any other regulatory authority to operate as a competitive local
34
<PAGE>
exchange carrier ("CLEC") and has been recognized by the CRTC as a CLEC eligible
to operate in Canada in certain defined markets.
(b) Permits. OPTEL (i) owns, possesses, holds or has obtained all
-------
material Canadian federal or provincial governmental and third party licenses,
permits, certificates, certifications, consents, orders, approvals and other
authorizations, including, without limitation, all waivers, licenses and
authorizations under the Telecommunications Act and decisions, orders and rules
established thereunder by the CRTC necessary to operate the business of OPTEL
and necessary to own and operate the Underlying Network Facilities and all
property associated therewith (the "Licenses"), other than those the absence of
which could not reasonably be expected to, individually or in the aggregate,
have a material adverse effect on OPTEL, and (ii) have not received any notice
of proceedings relating to the revocation or the modification of any of the
Licenses that, if determined adversely to OPTEL, could reasonably be expected
to, individually or in the aggregate, have a material adverse effect on OPTEL
taken as a whole.
(c) Telecommunications Assets. OPTEL owns, possesses, or leases and
-------------------------
maintains sufficient and appropriate telecommunications facilities and assets in
order to perform its obligations under the Agreement, and that those assets and
facilities are free of encumbrances other than any encumbrances disclosed to
RHYTHMS prior to the execution of the Agreement.
ARTICLE IX
TERMINATION
-----------
9.1 General. This Agreement shall terminate on the earlier to occur of:
-------
(a) written agreement of the Parties setting forth the terms of such
termination;
(b) the transfer of all of the Shares of JVCO held by the Parties to one
Party; or
(c) the twentieth anniversary of the Effective Date.
9.2 Termination by a Party for Cause. If any material breach of this
--------------------------------
Agreement shall occur and to the extent that such material breach is capable of
being cured, but is (A) not cured within one hundred twenty (120) days or (B)
reasonable steps to cure are not taken within twenty (20) Business Days after
the date that the Party committing such material breach (the "Defaulting Party")
receives written notice thereof, the non-Defaulting Party may deliver a written
notice of termination (the "Termination Notice") to the Defaulting Party at any
time, which Termination Notice shall be effective upon such delivery thereof.
Upon the effective date of such Termination Notice, the Parties agree as
follows:
(a) the Defaulting Party shall be deemed to have submitted the
resignation of each of the Directors nominated by it (and the Defaulting Party
shall cause each of such Directors to immediately so resign);
35
<PAGE>
(b) the Defaulting Party shall, upon request by the non-Defaulting Party,
assign all of its right, title and interest in the Shares of JVCO then held by
it to the non-Defaulting Party in exchange for payment of the Fair Market Value
of such transferred Shares;
(c) JVCO shall have the right, but not the obligation, upon written
notice to the Defaulting Party, to terminate the Defaulting Party's rights to
use or otherwise practice any intellectual property or technology developed
after the date of the other Party's receipt of the Termination Notice;
(d) the non-Defaulting Party and JVCO shall be entitled to avail
themselves cumulatively of any and all remedies available at law or in equity.
9.3 Liquidation; Survival.
---------------------
(a) Liquidation. Upon any termination and liquidation, to the extent
-----------
permitted by applicable law, the assets of JVCO shall be sold and distributed in
accordance with the Articles of Incorporation and applicable law.
(b) Survival. The Parties' rights and obligations which, by their
--------
nature, would continue beyond the termination, cancellation, or expiration of
this Agreement, including but not necessarily limited to Article VI and Sections
5.6(g), 5.8, 7.2, 10.1, 10.10 and 10.14 shall survive any termination of this
Agreement.
ARTICLE X
MISCELLANEOUS PROVISIONS
------------------------
10.1 Publicity. No Party (nor any Affiliate of any Party) will originate any
---------
publicity, news release, or other public announcement, relating to JVCO, this
Agreement or any other agreement between JVCO and either RHYTHMS or OPTEL or
their respective Affiliates, or the existence of an arrangement between the
Parties, without the prior written approval of the other Party, which approval
will not, be unreasonably withheld or delayed, except as otherwise required by
law.
10.2 Assignment. Neither this Agreement nor any of the rights or obligations
----------
under this Agreement may be assigned by any Party without the prior written
consent of the other Party, except to a permitted transferee under Article VII
of this Agreement.
10.3 Governing Law. This Agreement will be governed by and interpreted in
-------------
accordance with the internal laws of the Province of Ontario and the federal
laws of Canada applicable therein, without regard to conflicts-of-law
provisions.
10.4 Force Majeure. In the event that any Party is prevented from performing or
-------------
is unable to perform any of its obligations under this Agreement due to any act
of God; fire; casualty; flood; war; strike; lockout; failure of public
utilities; injunction or any act, exercise, assertion or requirement of
governmental authority; epidemic; destruction or production facilities; riots,
insurrection; inability to procure or use materials, labor, equipment,
transportation or energy; or any other cause beyond the reasonable control of
the Party invoking
36
<PAGE>
this Section 10.4 if such Party will have used its reasonable efforts to avoid
such occurrence and minimize its duration, such Party will give notice to the
other Party in writing promptly, and the affected Party's performance will be
excused and the time for performance will be extended for the period of delay or
inability to perform due to such occurrence.
10.5 Waiver. The waiver by either Party of a breach or a default of any
------
provision of this Agreement by the other Party will not be construed as a waiver
of any succeeding breach of the same or any other provision, nor will any delay
or omission on the part of either Party to exercise or avail itself of any
right, power or privilege that it has or may have operate as a waiver of any
right, power or privilege by such Party.
10.6 Notice, Consents, Etc. Except as otherwise provided in this
---------------------
Agreement, all notices, consents, agreements, confirmations, designations,
indications, requests, authorizations, and the like to be given under this
Agreement will be sufficient if in writing and sent via first class mail, or
delivered in person or by express courier or by facsimile with confirmed receipt
(with a copy sent via first class mail), addressed as follows:
If to RHYTHMS: Rhythms NetConnections Inc.
6933 South Revere Parkway
Englewood, Colorado 80112
Attn: Jeffrey Blumenfeld
Fax No.: (303) 476-5700
With a copy to: Rhythms NetConnections Inc.
6933 South Revere Parkway
Englewood, Colorado 80112
Attn: Chief Financial Officer
Fax No.: (303) 476-5700
If to OPTEL: Optel Communications Corporation
111 Peter Street
Toronto, Ontario M5V 2H1
Attn: President
Fax No.: (416) 907-2727
With a copy to: Optel Communications Corporation
111 Peter Street
Toronto, Ontario M5V 2H1
Attn: Chief Financial Officer
Fax No.: (416) 907-2733
If to JVCO: Rhythm Canada Inc.
111 Peter Street
Toronto, Ontario M5V 2H1
Attn: President
Fax No.: _____
37
<PAGE>
10.7 Entire Agreement. This Agreement and the Ancillary Agreements contain
----------------
the full understanding of the Parties with respect to the subject matter of this
Agreement and supersede all prior understandings and writings relating to such
subject matter; provided, however, that, this Agreement will not supersede or
-------- -------
modify in any respect any of the Ancillary Agreements identified in Schedule 1.3
------------
to this Agreement. No waiver, alteration or modification of any of the
provisions of this Agreement will be binding unless in writing and signed by all
the Parties.
10.8 Headings. The headings contained in this Agreement are for convenience
--------
of reference only and will not be considered in construing this Agreement.
10.9 Severability. In the event that any provision of this Agreement is
------------
held by a court of competent jurisdiction to be unenforceable because it is
invalid or in conflict with any law of any relevant jurisdiction, the validity
of the remaining provisions will not be affected, and the rights and obligations
of the Parties will he construed and enforced as if the Agreement did not
contain the particular provision held to be unenforceable.
10.10 Dispute Resolution.
------------------
(a) The Parties recognize that bona fide disputes as to business
matters may arise in the conduct of the JVCO Business, which disputes may impair
their ability of JVCO to effectively carry on its business.
(b) Each Party will act reasonably and in good faith to avoid
Business Deadlock. In the event of the occurrence of a Business Deadlock, either
Party may, by written notice to the other Party, have the Business Deadlock
referred to a panel consisting of one senior executive from RHYTHMS and one
senior executive from OPTEL for resolution by negotiation within thirty (30)
days after such written notice is received. All such negotiations will be
conducted reasonably and in a good faith manner in an effort to reach a mutually
satisfactory, unanimous resolution. Such resolution, if any, of the Business
Deadlock will be binding on the Parties, and the Parties will instruct the
members of the Board designated by them to approve such resolution.
(c) If, after the informal resolution procedure set forth in this
Section 10.10 has failed or the Parties are otherwise unable to resolve such
dispute within thirty (30) days (or such other period as the Parties may agree),
the Parties will submit the matter for binding resolution in accordance with the
rules of arbitration of the Arbitration Act (Ontario).
(d) Such arbitrator is authorized to render awards of monetary
damages, direction to take or refrain from taking action, or both. The
prevailing party, as determined by the arbitrator will be entitled to an award
of reasonable attorneys, fees and costs. Judgment upon the award rendered in any
such proceeding may be entered in any court of competent jurisdiction, or
application may be made to such court for judicial acceptance and enforcement of
the award and direction. Any such award or direction will be binding on the
Parties to the proceeding and final, except that for appeals on the grounds that
the award or direction were obtained through fraud. Such proceeding will be
confidential and no stenographic or other record need made of any such
proceeding other than a memorandum of understanding setting forth the elements
of any settlement or award reached. It is expressly agreed that either Party
38
<PAGE>
may seek injunctive relief or specific performance of the obligations under this
Agreement in an appropriate court of law or equity pending an award in
arbitration.
10.11 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which will be deemed an original but all of which together
will constitute one and the same instrument.
10.12 Expenses. Whether or not the transactions contemplated by this
--------
Agreement or the Ancillary Agreements will be consummated, RHYTHMS and OPTEL
will each bear its own expenses, including without limitation all expenses
relating to counsel incurred in connection with the preparation of this
Agreement or the Ancillary Agreements, the consummation of the transactions
contemplated hereby and thereby, and any waiver or amendment of, or consent
under this Agreement or the Ancillary Agreements.
10.13 Applicable Laws and Regulations. The Parties agree that all
-------------------------------
activities to be undertaken by or on behalf of JVCO will be conducted in
compliance with all applicable laws and regulations of the relevant
jurisdiction(s).
10.14 Indemnities.
(a) Each Party will indemnify and hold harmless the other Party or
Parties from and against any suit, claim, demand, liability, damage, loss, cost,
or expense, including legal fees and court costs ("Claim"), resulting from,
arising out of, or in any manner attributable to (i) any inaccuracy in any
representation or any breach of any warranty or other agreement or promise
contained in this Agreement or due to the inaccuracy of any document furnished
to it or caused to be furnished to it by the indemnifying Party pursuant to the
terms of this Agreement, (ii) any matter involving a Party's gross negligence or
intentional misconduct, or (iii) any act by a Party in violation of Article VI
and Sections 4.3 of this Agreement; provided, however, that this Section will
-------- -------
not be deemed to include any Claims resulting from, arising out of, in any
manner attributable to taxes based on income.
(b) A Party entitled to indemnification under this Section 10.14
will deliver written notice of any Claim to the indemnifying Party within ten
(10) Business Days following the date such Party first receives written notice
of such Claim; provided that failure to give this notice within the required
time period will not relieve the indemnifying Party of its obligations under
this Section 10.14 so long as no prejudice results from such failure. The
partner seeking indemnification will keep the indemnifying Party fully informed
of the progress of the claim and will afford the indemnifying Party and its
counsel full opportunity to participate in any action of the Claim. A Party
seeking indemnification will not settle the Claim for which indemnification is
sought without first obtaining written approval from the indemnifying Party.
Approval of a settlement by a Party against whom indemnification is being sought
will not be deemed an admission of liability under this Section 10.14.
10.15 Ancillary Agreements. Notwithstanding anything to the contrary in
--------------------
this Agreement, both Parties agree to use commercially reasonable efforts and to
diligently negotiate in good faith each of the Ancillary Agreements contemplated
by this Agreement within one
39
<PAGE>
hundred twenty (120) days after both Parties have executed this Agreement or
such extended period to which the Parties mutually agree.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
40
<PAGE>
IN WITNESS WHEREOF, the Parties to have caused this Agreement to be
executed in their names by their properly and duly authorized officers or
representatives as of January 1, 2000.
RHYTHMS NETCONNECTIONS INC., and
RHYTHMS LINKS, INC.
By: _______________________________________
Scott C. Chandler
Chief Financial Officer
and Executive Vice President
OPTEL COMMUNICATIONS CORPORATION
By: _______________________________________
Robert Latham
Chief Executive Officer and President
[SIGNATURE PAGE TO JOINT VENTURE AGREEMENT]
<PAGE>
SCHEDULE 1.25
-------------
DATA SERVICES
-------------
I. "DSL Service" means digital subscriber line, a transmission technology
-----------
enabling high-speed access in the local copper loop, often referred to as the
last mile between the network service provider i.e., an incumbent carrier,
competitive carrier or an internet service provider and end user. Included are
the various implementations of DSL including ADSL, SDSL, IDSL, RADSL and HDSL.
II. Technical Description.
---------------------
1. The Company will be in the business of providing services to customers.
The Company will provide services to customers from demanding industries like
banking and brokerage services, high-tech manufacturing, healthcare, media, and
other organizations with mission-critical networking requirements. The Company
will offer the following services:
. Internet Access - An affordable and reliable solution for any size
business to connect to the net through partnering ISP's. The Company
has chosen to team with a limited number of ISP partners.
. Teleworking - A solution for businesses whose employees need to work
from home and connect to a corporate network at higher speeds at any
hour.
. Branch Office Interconnect - A solution for businesses with multiple
branch offices or affiliates. The service provides communication with
their corporate network.
. New products and services as they are developed and become available
such as voice over DSL.
. Business to business connectivity.
2. From a technical perspective the Company offers:
. Dedicated and secure, always on broadband access, such as high-speed
DSL technology.
. Pan-Canadian coverage.
. Carrier-class reliable and managed network.
. Flexibility in Layer2 and Layer3 connectivity, including multi-protocol
support.
. Service selection possibilities for end-users.
Schedule 1.25
<PAGE>
. Scalable services (upgrade paths for speeds, features and endpoints).
. Complete installation all the way to the desktop.
. Customer service and support at any hour 24 hours a day, 7 days a week.
. Network based on technology positioned to carry integrated voice, data,
video, and multimedia all over a single line.
. Value Added Services like automatic data backup, PBX extension, caching,
multicast, etc.
The Company's service solutions include best-in-class customer service and
proactive network management. This means complete attention to every detail,
including ordering, provisioning, installation, billing and performance
reporting.
The Company also offers the possibility of turnkey project management for
each and every (end-user) installation. The installation includes the
installation all the way to your desktop, including inside wiring and equipment.
3. Technology platform. The infrastructure that the Company will deploy
-------------------
will have an architecture of hubs and spokes. In a selected number of cities
Metropolitan Service Centers (MSC's) will be built to which several Rhythms
Canada Connection Points (CP's) are connected. The CP's connect to the
individual endpoints (at the end-user premises) to provide high-speed access.
The Company's service delivery platform architecture in the Rhythms Canada CP's
and MSC's will mirror the service delivery platform used by Rhythms. The
Company's MSC's will be interconnected with the Rhythms MSC's. The costs of
these connections will be shared by the Company and Rhythms on a basis that is
consistent with the benefit that accrues to each Party.
Schedule 1.25
<PAGE>
SCHEDULE 1.3
------------
ANCILLARY AGREEMENTS
--------------------
Trademark Licensing Agreement
Technology License Agreement between RHYTHMS and JVCO
Technology License Agreement between OPTEL and JVCO
Schedule 1.3
<PAGE>
SCHEDULE 1.42
-------------
COMMUNICATIONS MARKETS
----------------------
The JVCO Communications Markets include the following metropolitan areas and
cities in Canada including their surrounding townships and villages:
1. Toronto (including Brampton, Mississauga, Oakville, Vaughan)
2. Montreal (Cote-St. Luc, Dorval)
3. Vancouver (including Burnaby, Coquitlam, Langley, New Westminster,
Richmond, Surrey)
4. Ottawa-Hull (including Gatineau, Hull, Kanata, Nepean, Orleans)
5. Edmonton (including Fort Saskatchewan, Leduc, Spruce Grove)
6. Calgary (including Airdrie)
7. Quebec City
8. Winnipeg
9. Hamilton (including Burlington, Stoney Creek)
10. London (including St. Thomas)
11. Kitchener-Waterloo (including Cambridge)
12. St. Catherines-Niagara
13. Halifax (including Dartmouth)
14. Victoria
15. Windsor
16. Oshawa
17. Saskatoon
18. Regina
19. St. John's
20. Sudbury
Schedule 1.42
<PAGE>
SCHEDULE 1.43
-------------
PRELIMINARY CUSTOMERS
---------------------
JVCO Customers are those large business customers listed on the Financial Post
- --------------
500 (attached hereto as Annex 1.43-A) with the exception of those Optel Pre-
------------
Existing Customers listed below.
Small and Medium Business Customers are those businesses in Canada that are:
- -----------------------------------
(a) not listed on the Financial Post 500 (attached hereto as Annex 1.43-A),
------------
and
(b) not on the preliminary list of U.S. business customers of RHYTHMS
(attached hereto as Annex 1.43-B) with facilities in Canada.
------------
Optel Pre-Existing Customers are the following businesses:
- ----------------------------
Sony Corporation MDS Inc.
George Weston Limited Cara Operations Limited
Loblaw Companies Limited Chrysler Credit Canada Ltd.
Magna International Inc. Cinram International Inc.
Hudson's Bay Company Chapters Inc.
Sears Canada Inc. Oxford Properties Group Inc.
Canadian Tire Corporation, Limited Scott's Restaurants Inc.
Dofasco Inc. Imax Corporation
Lafarge Corporation Mark's Work Wearhouse Ltd.
Westburne Inc. First Marathon Inc.
Future Shop Ltd. Vincor International Inc.
Union Gas Limited Chateau Stores of Canada Ltd.
Loews Cineplex Entertainment Corporation Arbor Memorial Services Inc.
Dylex Limited Pallet Pallet Inc.
Dover Industries Limited
Optel Combined Service Customers are the following businesses:
- --------------------------------
York University
The Montreal Hospital Association
Schedule 1.43
<PAGE>
SCHEDULE 4.1(a)
---------------
INITIAL BOARD OF DIRECTORS
--------------------------
RHYTHMS:
1. Scott Chandler
2. Steve Stringer
OPTEL:
1. Bill Young
2. Robert Latham
Schedule 4.1(a)
<PAGE>
SCHEDULE 4.5(a)
---------------
INITIAL BUSINESS PLAN AND SUPPORTING FINANCIAL INFORMATION
----------------------------------------------------------
The initial Business Plan with supporting financial information is attached
hereto as
Annex 4.5-A.
- -----------
Schedule 4.5(a)
<PAGE>
SCHEDULE 5.1(a)
---------------
PRELIMINARY HUMAN RESOURCES PLAN
--------------------------------
The preliminary Human Resources Plan of JVCO shall be based on the Staffing Plan
described on pages 11-14 of the Business Plan (attached hereto as Annex 4.5-A).
Schedule 5.1(a)
<PAGE>
SCHEDULE 5.3(a)
---------------
OPTEL LEASED ASSETS
-------------------
Equipment Description Quantity
- --------------------- --------
BPXS ATM Switch 2
7200 Router 1
Cisco 6100 DSLAM Chassis 14
Cisco 6130 DSLAM Chassis 7
Schedule 5.3(a)
<PAGE>
EXHIBIT A
---------
FORM OF ARTICLES OF INCORPORATION
---------------------------------
Exhibit A-1
<PAGE>
EXHIBIT B
---------
FORM OF BYLAWS
--------------
Exhibit B-1
<PAGE>
EXHIBIT C
---------
FORMS OF EMPLOYEE PROPRIETARY INFORMATION
-----------------------------------------
AND INVENTIONS AGREEMENTS
-------------------------
Exhibit C-1
<PAGE>
EXHIBIT D
---------
FORM OF TRADEMARK LICENSING AGREEMENT
-------------------------------------
Exhibit D-1
<PAGE>
EXHIBIT E
---------
FORM OF TECHNOLOGY LICENSE AGREEMENTS
-------------------------------------
Exhibit E-1
<PAGE>
Exhibit 10.34
PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT
BY AND AMONG
RHYTHMS NETCONNECTIONS INC.
AND
THE PURCHASERS LISTED ON SCHEDULE I HERETO
___________________
Dated as of
February 6, 2000
___________________
<PAGE>
This STOCK PURCHASE AGREEMENT is dated as of February 6, 2000 (this
"Agreement"), by and among Rhythms NetConnections Inc., a Delaware corporation
(the "Company"), and each of the purchasers listed on Schedule I hereto
(individually, a "Purchaser" and collectively, the "Purchasers").
WHEREAS, the Company proposes, subject to the terms and conditions set
forth herein, to issue and sell to the Purchasers 250,000 Shares of its 8.25%
Series E Convertible Preferred Stock, liquidation preference $1,000 per share,
par value $0.001 per share (the "Series E Preferred Stock");
WHEREAS, the Company proposes, subject to the terms and conditions set
forth herein, to issue and sell to the Purchasers warrants (each a "Warrant" and
together, the "Warrants") to purchase 5,625,000 shares of the Company's Common
Stock (the "Warrant Shares"), par value $0.001 per share, such Warrants to be
allocated and priced as follows: Warrants to purchase 1,875,000 Warrant Shares
at $45.00 per share with a term of three (3) years from the Closing Date
(defined below), Warrants to purchase 1,875,000 Warrant Shares at $50.00 per
share with a term of five (5) years from the Closing Date and Warrants to
purchase 1,875,000 Warrant Shares at $55.00 per share with a term of seven (7)
years from the Closing Date (each price an "Exercise Price" and together, the
"Exercise Prices"), in substantially the form as attached Exhibit A;
WHEREAS, the Company proposes to form a subsidiary for the purpose of
entering into business relationships in Latin America and desires to grant the
HMTF Purchasers (as defined below) an equity ownership interest equal to twenty-
five percent (25%) of the Capital Stock of such Subsidiary (the "Latin America
Subsidiary"),
WHEREAS, subject to the terms and conditions set forth herein, the
Purchasers desire to purchase such Series E Preferred Stock and Warrants from
the Company;
NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby
agree as follows.
ARTICLE I
DEFINITIONS
(a) As used in this Agreement, the following terms shall have the following
meanings:
"Affiliate" means, with respect to any Person, any other Person
directly or indirectly controlling, controlled by, or under direct or indirect
common control with, such Person. For the purposes of this definition and the
definition of "HMTF Purchaser", "control" when used with respect to any Person
means the power to direct the management and policies of such Person, directly
or indirectly, whether through the ownership of voting securities, by contract
or otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
"Applicable Law" means (a) any United States federal, state, local or
foreign law, statute, rule, regulation, order, writ, injunction, judgment,
decree or permit of any Governmental
<PAGE>
Authority and (b) any rule or listing requirement of any applicable national
stock exchange or listing requirement of any national stock exchange or
Commission recognized trading market on which securities issued by the Company
or any of the Subsidiaries are listed or quoted.
"Business Day" means any day other than a Saturday, a Sunday, the day
after Thanksgiving or a day when banks in The City of New York are authorized by
Applicable Law to be closed.
"Capital Stock" means (i) with respect to any Person that is a
corporation, any and all shares, interests, participations, rights or other
equivalents (however designated) of corporate stock and (ii) with respect to any
other Person, any and all partnership or other equity interests of such Person.
"Certificate of Designation" means the Certificate of Designation of
the Powers, Preferences and Relative, Participating, Optional and Other Special
Rights and Qualifications, Limitations and Restrictions thereof relating to the
Series E Preferred Stock, in the form attached hereto as Exhibit B.
"Commission" means the United States Securities and Exchange
Commission.
"Commission Filings" means all reports, registration statements and
other filings filed by the Company with the Commission (and all notes, exhibits
and schedules thereto and documents incorporated by reference therein).
"Common Stock" means the common stock, par value $0.001 per share, of
the Company.
"Contract" means any contract, lease, loan agreement, mortgage,
security agreement, trust indenture, note, bond, or other agreement (whether
written or oral) or instrument.
"Conversion Shares" means the shares of Common Stock issuable upon the
conversion of the Series E Preferred Stock in accordance with the terms of the
Certificate of Designation.
"Equity Documents" means this Agreement, the Registration Rights
Agreement, the Certificate of Designation, the Warrants, the Rights Agreement
Amendment and the Management Rights Agreement.
"Exchange Act" means the Securities Exchange Act of 1934, and the rules
and regulations of the Commission promulgated thereunder.
"GAAP" means United States generally accepted accounting principles,
consistently applied.
"Governmental Authority" means (i) any foreign, Federal, state or local
court or governmental or regulatory agency or authority, (ii) any arbitration
board, tribunal or mediator
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and (iii) any national stock exchange or Commission recognized trading market on
which securities issued by the Company or any of the Subsidiaries are listed or
quoted.
"HMTF" means Hicks, Muse, Tate & Furst Incorporated, a Texas
corporation.
"HMTF Funds" means the funds affiliated with the HMTF Purchaser
identified by the HMTF Purchaser on or prior to the Closing Date.
"HMTF Group" means HMTF and its Affiliates and their respective
officers, directors, partners, members, stockholders and employees (and members
of their respective families and trusts for the primary benefit of such family
members), and HMTF Purchaser and its Affiliates.
"HMTF Purchaser" means any one or more of the following: HMTF Bridge
RHY, LLC and one or more members of the HMTF Group designated by HMTF Bridge
RHY, LLC on or prior to the Closing Date.
"HMTF Shares" means the HMTF Issued Series E Preferred Shares held by
members of the HMTF Group plus the shares of Common Stock issued to and held by
members of the HMTF Group upon conversion of the HMTF Issued Series E Preferred
Shares.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, and applicable rules and regulations.
"Lien" means any mortgage, pledge, lien, security interest, claim,
restriction, charge or encumbrance of any kind.
"Material Adverse Effect" means a material adverse effect on the
condition (financial or otherwise), business, assets or results of operations of
the Company and the Subsidiaries, taken as a whole.
"Permitted Transferee" means, with respect to any Purchaser, or any
Permitted Transferee of any Purchaser, (i) any Purchaser Affiliate of such
Purchaser that is not a holder of common stock of the Company on the date hereof
or an affiliate of such holder; and (ii) any person that is a member of the HMTF
Group and any person investing, directly or indirectly, in or in parallel with
any member of the HMTF Group; provided, however, that each Permitted Transferee
must agree in writing pursuant to a Permitted Transferee Agreement, in
accordance with the provisions of Section 6.5, to be bound by the terms, and
subject to the conditions, of this Agreement to the same extent, and in the same
manner, as the transferring Purchaser prior to the transfer of any Securities to
such Permitted Transferee; and provided, further, that the transfer of
Securities from such Purchaser to such Permitted Transferee is in compliance
with all applicable securities laws.
"Person" means any individual, partnership, corporation, limited
liability company, joint venture, association, joint-stock company, trust,
unincorporated organization, government or agency or political subdivision
thereof, or other entity.
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"Purchaser Affiliate" means (a) any direct or indirect holder of any
equity interests or securities in any Purchaser (whether limited or general
partners, members, stockholders or otherwise), (b) any Affiliate of any
Purchaser or (c) any director, officer, employee, representative or agent of (i)
such Purchaser, (ii) any Affiliate of such Purchaser or (iii) any holder of
equity interests or securities referred to in clause (a) above.
"Registration Rights Agreement" means the Registration Rights
Agreement, to be dated as of the Closing Date, to be entered into by and among
the Company and the Purchasers, in the form attached hereto as Exhibit C.
"Rights Agreement Amendment" means an amendment dated as of February 6,
2000 to the Company's Rights Agreement dated as of April 2, 1999 between the
Company and American Securities Transfer and Trust, Inc., in substantially the
form attached as Exhibit D.
"Securities" means the Shares and the Warrants.
"Securities Act" means the Securities Act of 1933, and the rules and
regulations of the Commission promulgated thereunder.
"Series E Preferred Stock" has the meaning set forth in the first
recital to this Agreement. The Series E Preferred Stock has the designation,
powers, preferences and rights, and qualifications, limitations and restrictions
thereof set forth in the Certificate of Designation.
"Shares" means the shares of Series E Preferred Stock to be issued and
sold by the Company to the Purchasers pursuant to Section 2.1 hereof.
"Subsidiary" means, with respect to any Person (i) a corporation a
majority of whose capital stock with voting power, under ordinary circumstances,
to elect directors is at the time, directly or indirectly, owned by such Person,
by a subsidiary of such Person, or by such Person and one or more subsidiaries
of such Person, (ii) a partnership in which such Person or a subsidiary of such
Person is, at the date of determination, a general partner of such partnership
and has the power to direct the policies and management of such partnership or
(iii) any other Person (other than a corporation) in which such Person, a
subsidiary of such Person or such Person and one or more subsidiaries of such
Person, directly or indirectly, at the date of determination thereof, has (A) at
least a majority ownership interest or (B) the power to elect or direct the
election of the directors or other governing body of such Person.
"Subsidiary" means a subsidiary of the Company.
"Term" shall mean the 15-year period ending on the fifteenth
anniversary of the Issuance, after which the Shares, if not earlier redeemed or
converted, shall be mandatorily redeemed by the Company.
"Transactions" means the transactions contemplated by this Agreement
and the other Equity Documents.
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(b) As used in this Agreement, the following terms shall have the meanings
given thereto in the Sections set forth opposite such terms:
Term Section
---- -------
Agreement Preamble
Closing 2.2
Closing Date 2.2
Company Preamble
DGCL 3.2(b)
HMTF Director 5.2
HMTF Issued Series E Preferred Shares 5.2
Indemnified Party 8.1(c)
Indemnified Person 8.1(b)
Indemnifying Party 8.1(c)
Information 3.7
Issuance 2.1
Losses 8.1(b)
Management Rights Agreement 2.2(c)
Notices 8.2
Permitted Transferee Agreement 6.5
Projections 3.7
Purchaser; Purchasers Preamble
Purchase Price 2.1
Securities Transfer 6.5
Supplying Purchasers 8.18
ARTICLE II
SALE AND PURCHASE
SECTION 2.1. Agreement to Sell and to Purchase; Purchase Price. On the
Closing Date, and upon the terms and subject to the conditions set forth in this
Agreement, the Company shall issue and sell to each Purchaser, and each
Purchaser, severally and not jointly, shall purchase and accept from the Company
such number of Shares and Warrants as is set forth opposite such Purchaser's
name on Schedule 1 hereto (the "Issuance"), for a purchase price of one thousand
dollars ($1,000) per Share (the "Purchase Price").
SECTION 2.2. Closing. The closing of the Issuance to each Purchaser (the
"Closing") shall take place on a date to be specified by the Company and such
Purchaser, which shall be no later than the later of (A) the 2nd Business Day
after the date as of which all of the conditions set forth in Article VII hereof
shall have been satisfied as to the purchase by the HMTF Purchaser (or, to the
extent permitted, waived by the party or parties entitled to the benefit
thereof) and (B) 15 Business Days after the date hereof or at such other time
and date as the parties hereto shall agree in writing (such date and time, the
"Closing Date"), at the offices of Brobeck, Phleger & Harrison LLP, located at
550 West C Street, San Diego, California 92101 or at such other place
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as the parties hereto shall agree in writing. At such time as a Purchaser and
the Company shall have satisfied all the conditions set forth in Article VII, if
the Company elects, such Purchaser and the Company shall close separately on
such date.
At the Closing with respect to each Purchaser:
(a) Such Purchaser shall deliver:
(i) against delivery of a certificate or certificates
representing the Shares and the Warrants being purchased by
such Purchaser pursuant to Section 2.1, an amount equal to
the aggregate Purchase Price of such Securities via wire
transfer of immediately available funds to such bank account
as the Company shall designate not later than two Business
Days prior to the Closing Date;
(ii) a copy of the Registration Rights Agreement executed by such
Purchaser. At the Closing, with respect to each Purchaser:
At the Closing, with respect to each Purchaser:
(b) The Company shall deliver to such Purchaser:
(i) against payment of the Purchase Price therefor, a
certificate or certificates representing the Shares and
Warrants being purchased by such Purchaser pursuant to
Section 2.1, which shall be in definitive form and
registered in the name of such Purchaser or its nominee or
designee and in a single certificate or in such other
denominations as such Purchaser shall request not later than
two Business Days prior to the Closing Date;
(ii) an opinion of counsel to the Company, dated the Closing
Date, covering such matters as are customarily covered by
such opinions, in form and substance reasonably acceptable
to the Purchasers;
(iii) an officer's certificate of the Company as contemplated by
Section 7.2(f);
(iv) a certificate of the secretary of the Company covering such
matters as are customarily covered by such certificates and
as to the book value per share of the Common Stock, in form
and substance reasonably acceptable to the Purchasers;
(v) a long-form good standing certificate of the Company issued
by the Secretary of State of the State of Delaware; and
(vi) a copy of the Registration Rights Agreement executed by the
Company.
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(vii) A copy of the Rights Agreement Amendment.
(c) The Company shall deliver to the HMTF Funds a letter in the form
of Exhibit E executed by the Company (the "Management Rights Agreement").
(d) The Company shall deliver to Purchasers (or their designees) a
transaction fee equal to 3.25% of the Purchase Price of the Shares purchased by
Purchasers, in immediately available funds by wire transfer to an account
designated by Purchasers at least two Business Days prior to the Closing Date.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to each Purchaser on the date
hereof and on and as of the Closing Date as follows:
SECTION 3.1. Organization and Standing. Each of the Company and the material
domestic Subsidiaries is duly incorporated, validly existing and in good
standing under the laws of its state of incorporation and has all requisite
corporate power and authority to own its properties and assets and to carry on
its business as it is now being conducted and as proposed to be conducted. Each
of the Company and the material domestic Subsidiaries is duly qualified to
transact business as a foreign corporation and is in good standing in each
jurisdiction in which the character of the properties owned or leased by it or
the nature of its business makes such qualification necessary, except for any
such failures to so qualify or be in good standing that would not, individually
or in the aggregate, reasonably be expected to have a Material Adverse Effect.
All of the outstanding shares of Capital Stock of each such material
Subsidiary have been validly issued and are fully paid and non-assessable and,
except as provided on Schedule 3.1 hereof, are owned directly or indirectly by
the Company, free and clear of all pledges, claims, Liens, charges,
encumbrances, and security interest of any kind or nature whatsoever. The
Company does not own any equity interest in any corporation, partnership,
limited liability company, joint venture, or other entity except as provided on
Schedule 3.1(b) hereof.
The Company has delivered to Purchaser true and complete copies of the
Company's Certificate of Incorporation, as amended to date, and By-laws, as in
effect on the date hereof.
SECTION 3.2. Capital Stock. (a) As of the date of this Agreement, the
authorized Capital Stock of the Company consists solely of (i) 250,000,000
shares of Common Stock, par value $0.001 per share, of which 78,296,488 shares
are issued and outstanding as of December 31, 1999 (and no shares of Common
Stock have been issued since December 31, 1999 except those issued in respect to
the exercise of stock options), and (ii) 5,000,000 shares of preferred stock,
par value $0.001 per share, of which no shares are issued or outstanding. Each
share of Capital Stock of the Company that will be issued and outstanding
immediately following the Closing, including without limitation the Shares, will
be duly authorized and
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<PAGE>
validly issued and fully paid and nonassessable, and the issuance thereof will
not have been subject to any preemptive rights or made in violation of any
Applicable Law.
(b) Except as set forth on Schedule 3.2, as of the date of this
Agreement, there are (i) no outstanding options, warrants, agreements,
conversion rights, exchange rights, preemptive rights or other rights (whether
contingent or not) to subscribe for, purchase or acquire any issued or unissued
shares of Capital Stock of the Company or any Subsidiary, (ii) no authorized or
outstanding stock appreciation, phantom stock, profit participation, or similar
rights with respect to the Company or any Subsidiary, (iii) no rights,
contracts, commitments or arrangements (contingent or otherwise) obligating the
Company or any Subsidiary to either (A) redeem, purchase or otherwise acquire,
or offer to purchase, redeem, or otherwise acquire, any outstanding shares of,
or any outstanding warrants or rights of any kind to acquire any shares of, or
any outstanding securities that are convertible into or exchangeable for any
shares of, Capital Stock of the Company, or (B) pay any dividend or make any
distribution in respect of any shares of, or any outstanding securities that are
convertible or exchangeable for any shares of, Capital Stock of the Company,
(iv) no agreements or arrangements under which the Company or any Subsidiary is
obligated to register the sale of any of its securities under the Securities Act
(except as provided hereunder) and except as set forth in Schedule 3.2(a) and
(v) no restrictions upon, or Contracts or understandings of the Company or any
Subsidiary, or, to the knowledge of the Company, Contracts or understandings of
any other Person, with respect to, the voting or transfer of any shares of
Capital Stock of the Company or any Subsidiary. Except as set forth on Schedule
3.2(a), there are no securities or instruments containing antidilution or
similar provisions that will be triggered by the consummation of the
transactions contemplated hereby in accordance with the terms of this Agreement,
the Certificate of Designation or the Warrants. Except as set forth on Schedule
3.2(a), no party has any right of first refusal, right of first offer, right of
co-sale or other similar right regarding the Company's securities. Except as set
forth on Schedule 3.2(a), there are no provisions of the Certificate of
Incorporation, as amended, or the By-laws of the Company, no agreements to which
the Company is a party and no agreements by which the Company or any Subsidiary
are bound, that would (a) require the vote of the holders of more than a
majority of the shares of the Company's issued and outstanding Common Stock,
voting together as a single class, to take or prevent any corporate action,
other than those matters requiring a class vote under General Corporation Law of
the State of Delaware (the "DGCL"), or (b) entitle any party to nominate or
elect any director of the Company or require any of the Company's stockholders
to vote for any such nominee or other person as a director of the Company.
(c) The Conversion Shares and Warrant Shares have been duly authorized
and adequately reserved in contemplation of the conversion of the Series E
Preferred Stock and the exercise of the Warrants, respectively, and, when issued
and delivered in accordance with the terms of the Certificate of Designation or
the Warrants, as the case may be, will have been validly issued and will be
fully paid and nonassessable, and the issuance thereof will not have been
subject to any preemptive rights or made in violation of any Applicable Law.
(d) The holders of the Series E Preferred Stock will, upon issuance
thereof, have the rights set forth in the Certificate of Designation (subject to
the limitations and qualifications set forth therein and under the DGCL.
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SECTION 3.3. Authorization; Enforceability. The Company has the power and
authority to execute, deliver and perform its obligations under each of the
Equity Documents, and has taken all action necessary to authorize the execution,
delivery and performance by it of each of such Equity Documents and to
consummate the Transaction. No other corporate or stockholder proceeding on the
part of the Company is necessary for such authorization, execution, delivery and
consummation. The Company has duly executed and delivered this Agreement and, at
the Closing, the Company will have duly executed and delivered each of the other
Equity Documents to be executed and delivered at or prior to Closing. This
Agreement constitutes, and each of the other Equity Documents, when executed and
delivered by the Company, will constitute, a legal, valid and binding obligation
of the Company.
SECTION 3.4. No Violation; Consents. (a) The execution, delivery and
performance by the Company of each of the Equity Documents and the consummation
by the Company of the Transactions do not and will not contravene any Applicable
Law, except for any such contravention that would not, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect. The
execution, delivery and performance by the Company of each of the Equity
Documents and the consummation of the Issuance (i) will not (A) violate, result
in a breach of or constitute (with or without due notice or lapse of time or
both) a default (or give rise to any right of termination, cancellation or
acceleration) under any Contract to which the Company is a party or by which the
Company is bound or to which any of its assets is subject, or (B) result in the
creation or imposition of any Lien upon any of the assets of the Company, except
for any such violations, breaches, defaults or Liens that would not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect and (ii) will not conflict with or violate any provision of the
certificate of incorporation or bylaws or other governing documents of the
Company.
(b) Except as set forth on Schedule 3.4(b) and except for (i) the
filings by the Company, if any, required by the HSR Act, (ii) applicable
filings, if any, required by applicable federal and state securities laws and
(iii) filing of the Certificate of Designation with the Secretary of State of
the State of Delaware, in each case, which shall be made (or are not required to
be made) on or prior to the Closing Date, no consent, authorization or order of,
or filing or registration with, any Governmental Authority or other Person is
required to be obtained or made by the Company for the execution and delivery of
the Equity Documents or the consummation by the Company of the Transactions
except where the failure to obtain such consents, authorizations or orders, or
make such filings or registrations, would not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect or a material adverse
effect on the ability of the Company to consummate the transactions contemplated
hereby.
SECTION 3.5. Commission Filings; Financial Statements. (a) The Company has
filed all reports, registration statements and other filings, together with any
amendments or supplements required to be made with respect thereto, that it has
been required to file with the Commission under the Securities Act and the
Exchange Act. As of the respective dates of their filing with the Commission,
the Commission Filings complied in all material respects with the applicable
provisions of the Securities Act and the Exchange Act and did not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or
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necessary to make the statements made therein, in the light of the circumstances
under which they were made, not misleading.
(b) Each of the historical consolidated financial statements of the
Company (including any related notes or schedules) included in the Commission
Filings was prepared in accordance with GAAP (except as may be disclosed
therein), and complied in all material respects with the rules and regulations
of the Commission. Such financial statements fairly present the consolidated
financial position of the Company and the Subsidiaries as of the dates thereof
and the consolidated results of operations, cash flows and changes in
stockholders' equity for the periods then ended (subject, in the case of the
unaudited interim financial statements, to normal, recurring year-end audit
adjustments). Except as set forth on Schedule 3.5(b) or as reflected in the
Commission Filings filed prior to the date hereof, the Company does not have any
liabilities or obligations of any nature (whether accrued, absolute, contingent,
unasserted or otherwise) that individually or in the aggregate would be expected
to have a Material Adverse Effect.
SECTION 3.6. Private Offering. Based, in part, on the Purchasers'
representations in Section 4.2, the offer and sale of the Securities is exempt
from the registration and prospectus delivery requirements of the Securities
Act. Neither the Company, nor anyone acting on behalf of it, has offered or sold
or will offer or sell any securities, or has taken or will take any other action
(including, without limitation, any offering of any securities of the Company
under circumstances that would require, under the Securities Act, the
integration of such offering with the offering and sale of the Securities, which
would subject the Issuance to the registration provisions of the Securities
Act).
SECTION 3.7. Provided Information. To the knowledge of the Company, all
written information (excluding information of a general economic nature and
financial projections) concerning the Company and the Transactions (the
"Information") that has been prepared by or on behalf of the Company or any of
the Company's authorized representatives and that has been provided to the
Purchasers or any of their authorized representatives in connection with the
Issuance, when taken as a whole, was, at the time made available, correct in all
material respects and did not, at the time made available, contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements contained therein not misleading in light of the
circumstances under which such statements are made. All financial projections
concerning the Company and the Transactions (the "Projections") that have been
prepared by or on behalf of the Company or any of the Company's authorized
representatives and that have been delivered to the Purchasers or any of their
authorized representatives in connection with the Transactions have been
reasonably prepared on a basis reflecting the best currently available estimates
and judgments of the Company's management as to the future financial performance
of the Company and the individual business segments thereof.
SECTION 3.8. Material Adverse Change. Except as disclosed in the Commission
Filings filed as of the date hereof or as set forth on Schedule 3.8, since
September 30, 1999, there has not been any event, occurrence or development of a
state of circumstances or facts that has had, or could have reasonably been
expected to have, (i) a Material Adverse Effect or (ii) a material adverse
effect on the ability of the Company to perform its obligations under this
Agreement.
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SECTION 3.9. Litigation. Except as disclosed in Commission Filings filed as
of the date hereof or as set forth on Schedule 3.9, there are not any (a)
outstanding judgments against or affecting the Company or any of the
Subsidiaries, (b) proceedings pending or, to the knowledge of the Company,
threatened against or affecting the Company or any of the Subsidiaries or (c)
investigations by any Governmental Authority that are, to the knowledge of the
Company, pending or threatened against or affecting the Company or any of the
Subsidiaries that (i) in any manner challenge or seek to prevent, enjoin, alter
or materially delay the Transactions or (ii) if resolved adversely to the
Company or any Subsidiary, would have, individually or in the aggregate, a
Material Adverse Effect.
SECTION 3.10. Permits and Licenses. The Company and the Subsidiaries have
obtained all governmental permits, licenses, franchises and authorizations
required for the Company and the Subsidiaries to conduct their respective
businesses as currently conducted, except for those of which the failure to
obtain would not have a Material Adverse Effect.
SECTION 3.11. Intellectual Property, etc. Schedule 3.11 sets forth a true
and complete list of all patents, patent applications, trademarks, trade names,
service marks and registered copyrights and make work rights and applications
therefor, if any, owned by or licensed to the Company that are material to the
Company. All patents, patent applications, trademarks, mask works, service marks
and copyrights of the Company have been duly applied for or registered and filed
with or issued by each appropriate governmental entity in the jurisdictions
indicated on Schedule 3.11, all necessary affidavits of continuing use have been
filed and all necessary maintenance fees have been paid to continue all such
rights in effect. The Company owns or is licensed or otherwise has the right to
use, without payment to any other person except for fees set forth in Schedule
3.11, all intellectual property used in or necessary for the Company's business,
as presently conducted and as proposed to be conducted, except with respect to
"shrink-wrap" software. The Company's ownership and/or use of intellectual
property in its business, as presently conducted and as proposed to be conducted
does not conflict with, or result in any violation of, or default (with or
without notice or lapse of time, or both) under, or give rise to a right of
termination, cancellation or acceleration of any obligation or result in any
loss of a material benefit under or the creation of any Lien in or upon any of
the properties or assets of the Company under, any contract between the Company
and any person or any other intellectual property rights of any other person,
except for any such conflict, violation, default, right of termination,
cancellation, acceleration, loss of material benefit or creation of any Lien
which would not have a Material Adverse Effect.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS
Each Purchaser severally as to itself only, and not jointly, hereby
represents and warrants to the Company as of the date hereof and as of the
Closing Date as follows:
SECTION 4.1. Organization; Authorization; Enforceability. Such Purchaser is
duly organized, validly existing and in good standing under the laws of the
jurisdiction of its organization and has all requisite power and authority to
own its properties and assets and to carry on its business as it is now being
conducted and as currently proposed to be conducted.
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Such Purchaser has the power to execute, deliver and perform its obligations
under each of the Equity Documents to which it is a party and has taken all
action necessary to authorize the execution, delivery and performance by it of
such Equity Documents and to consummate the transactions contemplated hereby and
thereby. No other proceedings on the part of such Purchaser are necessary for
such authorization, execution, delivery and consummation. Such Purchaser has
duly executed and delivered this Agreement and, at the Closing, such Purchaser
will have duly executed and delivered each of the other Equity Documents to be
executed and delivered at or prior to Closing. This Agreement constitutes, and
each of the other Equity Documents to which such Purchaser is a party, when
executed and delivered by such Purchaser, will constitute, a legal, valid and
binding obligation of such Purchaser.
SECTION 4.2. Private Placement. (a) Such Purchaser understands that (i) the
offering and sale of the Securities, the Conversion Shares and the Warrant
Shares in the Issuance by the Company is intended to be exempt from registration
under the Securities Act pursuant to Section 4(2) thereof and (ii) there is no
existing public or other market for the Securities.
(b) Such Purchaser (either alone or together with its advisors) has
sufficient knowledge and experience in financial and business matters so as to
be capable of evaluating the merits and risks of its investment in the
Securities, the Conversion Shares and the Warrant Shares, and is capable of
bearing the economic risks of such investment.
(c) Such Purchaser is acquiring the Securities, the Conversion Shares
and the Warrant Shares to be acquired hereunder for its own account (or for
accounts over which it exercises investment authority or as otherwise provided
herein), for investment and not with a view to the public resale or distribution
thereof, in violation of any securities law.
(d) Such Purchaser understands that the Securities, the Conversion
Shares and the Warrant Shares will be issued in a transaction exempt from the
registration or qualification requirements of the Securities Act and applicable
state securities laws, and that such securities must be held indefinitely unless
a subsequent disposition thereof is registered or qualified under the Securities
Act and such laws or is exempt from such registration or qualification.
(e) Such Purchaser (A) has been furnished with or has had full access
to all of the information that it considers necessary or appropriate to make an
informed investment decision with respect to the Securities, the Conversion
Shares and the Warrant Shares and that it has requested from the Company, (B)
has had an opportunity to discuss with management of the Company the intended
business and financial affairs of the Company and to obtain information (to the
extent the Company possessed such information or could acquire it without
unreasonable effort or expense) necessary to verify any information furnished to
it or to which it had access and (C) can bear the economic risk of (x) an
investment in the Securities, the Conversion Shares and the Warrant Shares
indefinitely and (y) a total loss in respect of such investment, has such
knowledge and experience in business and financial matters so as to enable it to
understand and evaluate the risks of and form an investment decision with
respect to its investment in the Securities, the Conversion Shares and the
Warrant Shares and to protect its own interest in connection.
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(f) The foregoing representations with respect to the Conversion
Shares and the Warrant Shares are made only if and to the extent the offering of
the Shares and the Warrants constitutes an offering of the Conversion Shares and
the Warrant Shares.
SECTION 4.3. No Violation; Consents. (a) The execution, delivery and
performance by such Purchaser of each of the Equity Documents to which it is a
party and the consummation of the Transactions do not and will not contravene
any Applicable Law, except for such contraventions as would not, individually or
in the aggregate, reasonably be expected to have a material adverse effect on
the ability of such Purchaser to timely perform its obligations under this
Agreement. The execution, delivery and performance by such Purchaser of each of
the Equity Documents to which it is a party and the consummation of the
Transactions contemplated therein (i) will not (A) violate, result in a breach
of or constitute (with or without due notice or lapse of time or both) a default
(or give rise to any right of termination, cancellation or acceleration) under
any Contract to which such Purchaser is party or by which such Purchaser is
bound or to which any of its assets is subject, or (B) result in the creation or
imposition of any Lien upon any of the assets of such Purchaser, except for any
such violations, breaches, defaults or Liens that would not, individually or in
the aggregate, reasonably be expected to have a material adverse effect on the
ability of such Purchaser to timely perform its obligations under this
Agreement, and (ii) will not conflict with or violate any provision of the
certificate of incorporation or bylaws or other governing documents of such
Purchaser.
(b) Except for (i) the filings by the Purchaser, if any, required by
the HSR Act, and (ii) applicable filings, if any, with the Commission pursuant
to the Exchange Act, in each case, which shall be made (or are not required to
be made) on or prior to the Closing Date, no consent, authorization or order of,
or filing or registration with, any Governmental Authority or other Person is
required to be obtained or made by such Purchaser for the execution, delivery
and performance of any of the Equity Documents to which it is a party or the
consummation of any of the transactions contemplated therein, except where the
failure to obtain such consents, authorizations or orders, or make such filings
or registrations, would not, individually or in the aggregate, reasonably be
expected to have a material adverse effect on the ability of such Purchaser to
timely perform its obligations under this Agreement.
SECTION 4.4. No Litigation. There are not any (a) outstanding judgments
against or affecting the Purchaser or any of its subsidiaries, (b) proceedings
pending or, to the knowledge of the Purchaser, threatened against or affecting
the Purchaser or any of its subsidiaries or (c) investigations by any
Governmental Authority that are, to the knowledge of the Purchaser, pending or
threatened against or affecting the Purchaser or any of its subsidiaries that,
in any case, individually or in the aggregate, would reasonably be expected to
have a material adverse effect on the ability of such Purchaser to timely
perform its obligations under this Agreement.
ARTICLE V
COVENANTS OF THE COMPANY
SECTION 5.1. Operation of Business. From the date hereof until the Closing
Date, the Company shall, and shall cause each of the Subsidiaries to:
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(i) operate its business in all material respects in the
ordinary course and in compliance with Applicable Laws;
(ii) not adopt any amendment to its charter or bylaws or
comparable organizational documents;
(iii) not split, combine or reclassify any shares of the Company's
Capital Stock;
(iv) not declare or pay any dividend or distribution (whether in
cash, stock or property) in respect of its Capital Stock or
increase the number of shares subject to the Company's stock
incentive and option plan;
(v) not take any action, or knowingly omit to take any action,
that would, or that would reasonably be expected to, result
in (A) any of the representations and warranties of the
Company set forth in Article III becoming untrue or (B) any
of the conditions to the obligations of Purchaser set forth
in Section 7.2 not being satisfied or (C) the triggering of
any of the anti-dilution adjustments contained in the
Certificate of Designation for the Series E Preferred Stock
(had such Certificate been in effect); or
(vi) enter into any agreement or commitment to do any of the
foregoing.
SECTION 5.2. HMTF Director. For so long as members of the HMTF Group own any
combination of the shares of Series E Preferred Shares issued to members of the
HMTF Group on the Closing Date (the "HMTF Issued Series E Preferred Shares") and
Common Stock issued upon conversion of HMTF Issued Series E Preferred Shares
that, taken together, would represent, if all HMTF Issued Series E Preferred
Shares were converted, an amount of Common Stock issuable upon conversion of 40%
or more of the HMTF Issued Series E Preferred Shares, the holders of a majority
of the then outstanding HMTF Shares shall have a right to designate one member
of the Company's Board of Directors (the "HMTF Director"); provided, however,
that the right to designate the HMTF Director under this Section 5.2 shall be
suspended at any time that members of the HMTF Group own at least 100 shares of
Series E Preferred Stock and have the right to elect a person to the Board of
Directors under the terms of the Series E Preferred Stock set forth in the
Certificate of Designation. In the event the holders of a majority of the then
outstanding HMTF Shares are entitled under this Section 5.2 to designate the
HMTF Director for election to the Company's Board of Directors and elect to have
the Board of Directors appoint the HMTF Director, they shall so notify the
Company in writing and the Company shall (a) increase the size of the Board of
Directors by one and fill the vacancy created thereby by electing the HMTF
Director and (b) in connection with the meeting of stockholders of the Company
next following such election, nominate such HMTF Director for election as
director by the stockholders and use its commercially reasonable efforts to
cause the HMTF Director to be so elected. If the holders of a majority of the
then outstanding HMTF Shares are entitled under this Section 5.2 to designate
the HMTF Director for election to the Company's
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Board of Directors and a vacancy shall exist in the office of a HMTF Director,
the holders of a majority of the then outstanding HMTF Shares shall be entitled
to designate a successor and the Board of Directors shall elect such successor
and, in connection with the meeting of stockholders of the Company next
following such election, nominate such successor for election as director by the
stockholders and use its commercially reasonable efforts to cause the successor
to be elected.
SECTION 5.3. Access to Books and Records. (a) The Company shall afford to
each of the Purchasers and the Purchasers' accountants, counsel and
representatives full access during normal business hours throughout the period
prior to the Closing Date (or the earlier termination of this Agreement pursuant
to Section 8.4) to all its properties, books, Contracts, commitments and records
(including, but not limited to, tax returns) and, during such period, shall,
upon request, furnish promptly to each of the Purchasers (i) a copy of each
report, schedule and other document filed or received by any of them pursuant to
the requirements of Federal or state securities laws and (ii) all other
information concerning its business, properties and personnel as the Purchasers
may reasonably request, provided that no investigation or receipt of information
pursuant to this Section 5.3 shall affect any representation or warranty of the
Company or the conditions to the obligations of the Purchasers.
(b) The Company shall supplement the Information and the Projections
from time to time until the Closing Date if there is a material change in the
Information and the Projections previously provided, but no such supplement
shall be given effect for purposes of determining whether the Company has
breached any representations or warranties for purposes of Section 7.2 and
Section 8.1.
SECTION 5.4. Agreement to Take Necessary and Desirable Actions. The Company
shall (a) subject to the satisfaction of the conditions set forth in Section
7.1, execute and deliver the Equity Documents and such other documents,
certificates, agreements and other writings, and (b) take such other actions, in
each case, as may be necessary or reasonably requested by any of the Purchasers
in order to consummate or implement the Issuance in accordance with the terms of
this Agreement.
SECTION 5.5. Compliance with Conditions; Commercially Reasonable Efforts.
The Company shall use all commercially reasonable efforts to cause all
conditions precedent to the obligations of the Company and the Purchasers to be
satisfied. Upon the terms and subject to the conditions of this Agreement, the
Company will use all commercially reasonable efforts to take, or cause to be
taken, all action, and to do, or cause to be done, all things necessary, proper
or advisable consistent with Applicable Law to consummate and make effective in
the most expeditious manner practicable the Issuance in accordance with the
terms of this Agreement.
SECTION 5.6. HSR Act Notification. To the extent required by the HSR Act,
the Company shall, to the extent it has not already done so, (a) use all
commercially reasonable efforts to file or cause to be filed, as promptly as
practicable after the execution and delivery of this Agreement, with the United
States Federal Trade Commission and the Antitrust Division of the United States
Department of Justice, all reports and other documents required to be filed by
it under the HSR Act concerning the transactions contemplated hereby and (b) use
all commercially reasonable efforts to promptly comply with or cause to be
complied with any requests by the United States Federal Trade Commission or the
Antitrust Division of the United
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States Department of Justice for additional information concerning such
transactions, in each case so that the waiting period applicable to this
Agreement and the transactions contemplated hereby under the HSR Act shall
expire as soon as practicable after the execution and delivery of this
Agreement. The Company agrees to request, and to cooperate with the Purchasers
in requesting, early termination of any applicable waiting period under the HSR
Act.
SECTION 5.7. Consents and Approvals. The Company (a) shall use all
commercially reasonable efforts to obtain all necessary consents, waivers,
authorizations and approvals of all Governmental Authorities and of all other
Persons required in connection with the execution, delivery and performance of
the Equity Documents or the consummation of the Issuance and (b) shall
diligently assist and cooperate with the Purchasers in preparing and filing all
documents required to be submitted by the Purchasers to any Governmental
Authority in connection with the Issuance (which assistance and cooperation
shall include, without limitation, timely furnishing, upon written requests, to
the Purchasers all information concerning the Company and the Subsidiaries that
counsel to the Purchasers reasonably determines is required to be included in
such documents or would be helpful in obtaining any such required consent,
waiver, authorization or approval).
SECTION 5.8. Reservation of Shares. The Company shall:
(i) cause to be authorized and reserve and keep available at all
times during which any of the Shares and Warrants remain
outstanding, free from preemptive rights, out of its
treasury stock or authorized but unissued shares of Capital
Stock, or both, solely for the purpose of effecting the
conversion or exercise of the Shares or Warrants pursuant to
the terms of the Certificate of Designation, sufficient
shares of Common Stock to provide for the issuance of the
maximum number of shares issuable upon conversion or
exercise of outstanding Shares and Warrants;
(ii) issue and cause the transfer agent to deliver such shares of
Common Stock as required upon conversion or exercise of the
Shares and Warrants; and
(iii) if any shares of Common Stock reserved for the purpose of
issuance upon conversion of the Shares and Warrants require
registration with or approval of any Governmental Authority
under any Applicable Law before such shares may be validly
issued or delivered, secure such registration or approval,
as the case may be, and maintain such registration or
approval in effect so long as so required.
SECTION 5.9. Use of Proceeds. The Company shall use the proceeds from the
Issuance for payment of expenses incurred in connection with the Transactions
and for general corporate purposes.
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SECTION 5.10. Filing of Certificate of Designation. Prior to the Issuance,
the Company shall file the Certificate of Designation with the Secretary of
State of the State of Delaware pursuant to Section 151(g) of the DGCL.
SECTION 5.11. Listing of Shares. The Company shall use all commercially
reasonable efforts to cause the shares of Common Stock issuable upon conversion
of the Shares to be listed or otherwise eligible for trading on the NASDAQ
National Market System or other national securities exchange.
SECTION 5.12. Periodic Information. For so long as the Securities are
outstanding the Company shall file all reports required to be filed by the
Company under Section 13 or 15(d) of the Exchange Act and shall provide the
holders of the Securities and prospective purchasers of such shares with the
information specified in Rule 144A(d) under the Securities Act.
SECTION 5.13. Legends. So long as applicable, each certificate representing
any portion of the Securities, shall contain, be stamped or otherwise imprinted
with a legend in the following form (in addition to any legend required under
applicable state securities laws):
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR THE
SECURITIES LAWS OF ANY STATE OF THE UNITED STATES. SUCH SHARES MAY NOT BE
OFFERED, SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF
IN THE ABSENCE OF SUCH REGISTRATION OTHER THAN PURSUANT TO AN EXEMPTION FROM
SUCH REGISTRATION REQUIREMENTS.
After the above requirement for a legend is no longer applicable because the
Securities are freely transferable under the Securities Act, the Company shall
remove such legend upon request from a holder of such Securities, if outside
counsel for such holder reasonably determines that the transfer of such
Securities is no longer restricted by the Securities Act and outside counsel for
the Company reasonably concurs in such determination.
SECTION 5.14. Payment; Paying Agent; Certain Information. The Company shall
(i) make any required payments on the Securities;
(ii) maintain (a) an office or agency where the Securities may be
presented for payment (the "Paying Agent"), (b) an office or
agency where the Securities may be presented for conversion
(the "Conversion Agent"), and (c) a Registrar, which shall
be an office or an agency where the Securities may be
presented for transfer; and
(iii) provide certain information to the Purchasers, including
such information and notices as may be necessary for the
Purchasers to exercise their rights under this Agreement and
in connection with conversion or exercise of the Securities.
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SECTION 5.15. Latin American Subsidiary. The Company agrees to form the
Latin American Subsidiary and to issue to the HMTF Purchasers an aggregate
equity interest in (and proportional representation on the board of) the Latin
American Subsidiary equal to twenty-five percent (25%) of the issued and
outstanding Capital Stock of the Latin American Subsidiary as soon as
practicable after its formation. The HMTF Purchasers' interest will not be
reduced or diluted by the first twenty-five million dollars ($25,000,000)
invested by the Company. The organizational and constitutive documents for the
Latin American Subsidiary and the joint venture will be subject to the HMTF
Purchasers' prior approval, such consent not to be unreasonably withheld or
delayed, and shall contain with respect to the HMTF Purchasers such terms as are
customary for private equity investments in private companies (including,
without limitation, appropriate liquidity and minority protection provisions).
SECTION 5.16. Latin American Venture. Attached hereto as Exhibit F is a term
sheet describing the indicative terms of a proposed joint venture arrangement to
exploit DSL opportunities in Latin America. The Company will use commercially
reasonable efforts to cause the Latin American Subsidiary to effect the joint
venture, but nothing in this Section 5.16 shall compel the Company to go forward
with the joint venture if in its commercial judgment it would be imprudent or
inadvisable to do so. The Company will not create any other entity, or enter
into any other venture or partnership to exploit DSL opportunities in Latin
America without granting the HMTF Purchasers an interest identical to that held
in the Latin American Subsidiary. The HMTF Purchasers shall be entitled to
representation on any board subcommittee or other board-level task force
assigned to supervise the Company's Latin American venture, if formed, in
proportion to their equity interest in the Latin American Subsidiary.
ARTICLE VI
COVENANTS OF THE PURCHASERS
SECTION 6.1. Agreement to Take Necessary and Desirable Actions. Each
Purchaser shall (a) subject to the satisfaction of the conditions set forth in
Section 7.2, execute and deliver each of the Equity Documents to which it is a
party and such other documents, certificates, agreements and other writings and
(b) take such other actions as may be reasonably necessary, desirable or
requested by the Company in order to consummate or implement the Transactions in
accordance with the terms of this Agreement.
SECTION 6.2. Compliance with Conditions; Commercially Reasonable Efforts.
Each Purchaser will use all commercially reasonable efforts to cause all of the
obligations imposed upon it in this Agreement to be duly complied with, and to
cause all conditions precedent to the obligations of the Company and the
Purchasers to be satisfied. Upon the terms and subject to the conditions of this
Agreement, each Purchaser will use all commercially reasonable efforts to take,
or cause to be taken, all action, and to do, or cause to be done, all things
necessary, proper or advisable consistent with applicable law to consummate and
make effective in the most expeditious manner practicable the Transactions in
accordance with the terms of this Agreement.
SECTION 6.3. HSR Act Notification. To the extent required by the HSR Act,
each Purchaser shall, if it has not already done so, (a) use all commercially
reasonable efforts to file or cause to be filed, as promptly as practicable
after the execution and delivery of this Agreement,
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with the United States Federal Trade Commission and the Antitrust Division of
the United States Department of Justice, all reports and other documents
required to be filed by it under the HSR Act concerning the transactions
contemplated hereby and (b) use all commercially reasonable efforts to promptly
comply with or cause to be complied with any requests by the United States
Federal Trade Commission or the Antitrust Division of the United States
Department of Justice for additional information concerning such transactions in
each case so that the waiting period applicable to this Agreement and the
transactions contemplated hereby under the HSR Act shall expire as soon as
practicable after the execution and delivery of this Agreement. Purchaser agrees
to request, and to cooperate with the Company in requesting, early termination
of any applicable waiting period under the HSR Act.
SECTION 6.4. Consents and Approvals. Each Purchaser (a) shall use all
commercially reasonable efforts to obtain all necessary consents, waivers,
authorizations and approvals of all Governmental Authorities other than as
expressly set forth in Section 6.3 regarding the HSR Act, and of all other
Persons required in connection with the execution, delivery and performance of
this Agreement or the consummation of the Transactions and (b) shall diligently
assist and cooperate with the Company in preparing and filing all documents
required to be submitted by the Company to any Governmental Authority in
connection with such Transactions (which assistance and cooperation shall
include, without limitation, timely furnishing to the Company all information
concerning such Purchaser that counsel to the Company reasonably determines is
required to be included in such documents or would be helpful in obtaining any
such required consent, waiver, authorization or approval).
SECTION 6.5. Restrictions on Transfer. No Purchaser shall sell, assign,
transfer, pledge, hypothecate, deposit in a voting trust or otherwise dispose of
any portion of the Securities (any such disposition, a "Securities Transfer"),
other than (a) to a Permitted Transferee of such Purchaser that has agreed in
writing (each, a "Permitted Transferee Agreement") to be bound by the terms and
provisions of this Section 6.5 to the same extent that the transferring
Purchaser would be bound if it beneficially owned the Securities transferred to
such Permitted Transferee or (b)(i) in any transaction in compliance with Rule
144 under the Securities Act or any successor rule or regulation, (ii) in a
transaction exempt from the registration requirements of the Securities Act or
(iii) pursuant to a registration statement. Each Purchaser shall promptly notify
the Company of any Securities Transfer to a Permitted Transferee of such
Purchaser, which notification shall include a Permitted Transferee Agreement
executed by each Permitted Transferee of such Purchaser to whom any Securities
have been transferred .
ARTICLE VII
CONDITIONS PRECEDENT TO CLOSING
SECTION 7.1. Conditions to the Company's Obligations. The obligations of the
Company with respect to a Purchaser hereunder required to be performed on the
Closing Date shall be subject to the satisfaction or waiver, at or prior to the
Closing, of the following conditions:
(a) The representations and warranties of such Purchaser contained in
this Agreement shall have been true and correct when made and, in addition,
shall be repeated and
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true and correct in all material respects on and as of the Closing Date with the
same force and effect as though made on and as of the Closing Date.
(b) Such Purchaser shall have performed in all material respects all
obligations and agreements, and complied in all material respects with all
covenants contained in this Agreement to be performed and complied with by such
Purchaser at or prior to the Closing Date.
(c) Any applicable waiting period under the HSR Act with respect to
the purchase by such Purchaser shall have expired or been terminated.
(d) The Company shall have obtained all necessary consents, waivers,
authorizations and approvals of all Governmental Authorities and of all other
Persons required in connection with the execution, delivery and performance of
the Equity Documents or the consummation of the Issuance.
(e) Such Purchaser shall have entered into the Registration Rights
Agreement.
SECTION 7.2. Conditions to Each Purchaser's Obligations. The obligations of
a Purchaser hereunder required to be performed on the Closing Date shall be
subject to the satisfaction or waiver, at or prior to the Closing, of the
following conditions:
(a) The representations and warranties of the Company contained in
this Agreement (i) shall have been true and correct when made and (ii) shall be
(A) in the case of representations and warranties that are qualified as to
materiality or Material Adverse Effect, true and correct and (B) in all other
cases, true and correct in all material respects, in the case of clauses (A) and
(B), as of the Closing Date with the same force and effect as though made on and
as of the Closing Date.
(b) The Company shall have performed in all material respects all of
its obligations, agreements and covenants contained in this Agreement to be
performed and complied with at or prior to the Closing Date.
(c) The Company shall have entered into the Registration Rights
Agreement.
(d) The Company shall have filed the Certificate of Designation with
the Secretary of State of the State of Delaware.
(e) Any applicable waiting period under the HSR Act with respect to
the purchase by such Purchaser shall have expired or been terminated.
(f) The Company shall have delivered to such Purchaser a certificate
executed by it or on its behalf by a duly authorized representative, dated the
Closing Date, to the effect that each of the conditions specified in paragraph
(a) through (e) of this Section 7.2 has been satisfied.
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(g) No provision of any Applicable Law, injunction, order or decree of
any Governmental Entity shall be in effect which has the effect of making the
Transactions illegal or shall otherwise restrain or prohibit the consummation of
the Transactions.
(h) Such Purchaser shall have received an opinion of counsel to the
Company, dated the Closing Date, and addressed to such Purchaser, in form and
substance reasonably acceptable to the Purchaser.
(i) Such Purchaser shall have received certificates representing the
Securities purchased by such Purchaser concurrently with the Company's receipt
of the Purchase Price for such Securities.
(j) The Purchaser shall have executed and caused its rights agent to
execute the Rights Agreement Amendment.
(k) The Company shall have delivered to the HMTF Purchasers a
Management Rights Agreement executed by the Company and addressed to the HMTF
Funds.
(l) There shall not have occurred (i) any event, circumstance,
condition, fact, effect or other matter which has had or could reasonably be
expected to have a material adverse effect (x) on the business, assets,
financial condition, prospects, or results of operations of the Company and the
Subsidiaries taken as a whole or (y) on the ability of the Company and the
Subsidiaries to perform on a timely basis any material obligation under this
Agreement or to consummate the Issuance contemplated hereby; or (ii) any
material disruption of or material adverse change in financial, banking or
capital market conditions that would reasonably be expected to materially impair
the Company's ability to obtain financing on reasonable terms.
ARTICLE VIII
MISCELLANEOUS
SECTION 8.1. Indemnification. (a) All representations, warranties, covenants
and agreements contained in this Agreement shall survive the Closing for 18
months (except (i) covenants and agreements that are required to be performed
after the Closing Date and (ii) the last sentence of Section 3.2(a), which shall
survive indefinitely). Notwithstanding the foregoing, with respect to claims
asserted pursuant to this Section 8.1 before the expiration of the applicable
representation, warranty, covenant or agreement, such claims shall survive until
the date they are finally adjudicated or otherwise resolved.
(b) The Company agrees to indemnify and hold harmless each Purchaser
and each Purchaser Affiliate (each an "Indemnified Person"), from and against
(and to reimburse each indemnified person as the same are incurred) any and all
losses (including, but not limited to, impairment of the value of the Shares and
Warrants as of the date such loss first becomes known, but excluding
consequential damages), claims, damages, liabilities, costs and expenses
(collectively, "Losses") to which any indemnified person may become subject or
which any indemnified person may incur based upon, arising out of, or in
connection with (i) a breach of any representation, warranty or covenant of this
Agreement by the Company or (ii) any claim,
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litigation, investigation or proceeding brought by or on behalf of any Person
other than the Company relating to the Issuance, and to reimburse each
indemnified person upon demand for any reasonable legal or other reasonable out
of pocket expenses incurred in connection with investigating or defending any of
the foregoing, provided the maximum amount indemnifiable to each Purchaser (and
its successors or assigns) under clause (i) shall not exceed the purchase price
of the Shares and Warrants purchased by such Purchaser.
(c) If a Person entitled to indemnity hereunder (an "Indemnified
Party") asserts that the Company (the "Indemnifying Party") has become obligated
to the Indemnified Party pursuant to Section 8.1(b), or if any suit, action,
investigation, claim or proceeding is begun, made or instituted as a result of
which the Indemnifying Party may become obligated to the Indemnified Party
hereunder, the Indemnified Party shall notify the Indemnifying Party promptly
and shall cooperate with the Indemnifying Party, at the Indemnifying Party's
expense, to the extent reasonably necessary for the resolution of such claim or
in the defense of such suit, action or proceedings, including making available
any information, documents and things in the possession of the Indemnified
Party. Notwithstanding the foregoing notice requirement, the right to
indemnification hereunder shall not be affected by any failure to give, or delay
in giving, notice unless, and only to the extent that, the rights and remedies
of the Indemnifying Party shall have been materially prejudiced as a result of
such failure or delay.
(d) In fulfilling its obligations under this Section 8.1, after the
Indemnifying Party has provided each Indemnified Party with a written notice of
its acceptance of liability under this Section 8.1, as between such Indemnified
Party and the Indemnifying Party, the Indemnifying Party shall have the right to
investigate, defend, settle or otherwise handle, with the aforesaid cooperation,
any claim, suit, action or proceeding brought by a third party in such manner as
the Indemnifying Party may in its sole discretion reasonably deem appropriate;
provided, that (i) counsel retained by the Indemnifying Party is reasonably
satisfactory to the Indemnified Party and (ii) the Indemnifying Party will not
consent to any settlement or entry of judgment imposing any obligations on any
other party hereto other than financial obligations for which such party will be
indemnified hereunder, unless such party has consented in writing to such
settlement or judgment (which consent may be given or withheld in its sole
discretion) and (iii) the Indemnifying Party will not consent to any settlement
or entry of judgment unless, in connection therewith, the Indemnifying Party
obtains a full and unconditional release of the Indemnified Party from all
liability with respect to such suit, action, investigation claim or proceeding.
Notwithstanding the Indemnifying Party's election to assume the defense or
investigation of such claim, action or proceeding, the Indemnified Party shall
have the right to employ separate counsel and to participate in the defense or
investigation of such claim, action or proceeding, which participation shall be
at the expense of the Indemnifying Party, if (i) on the advice of counsel to the
Indemnified Party use of counsel of the Indemnifying Party's choice could
reasonably be expected to give rise to a material conflict of interest, (ii) the
Indemnifying Party shall not have employed counsel reasonably satisfactory to
the Indemnified Party to represent the Indemnified Party within a reasonable
time after notice of the assertion of any such claim or institution of any such
action or proceeding, (iii) if the Indemnifying Party shall authorize the
Indemnified Party to employ separate counsel at the Indemnifying Party's expense
or (iv) such action shall seek relief other than monetary damages against the
Indemnified Party.
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<PAGE>
(e) The Company and the Purchasers agree that any payment of Losses
made hereunder will be treated by the parties on their tax returns as an
adjustment to the Purchase Price. If, notwithstanding such treatment by the
parties, a final determination (which shall include the form 870-AD or successor
form) with respect to the Indemnified Party or any of its affiliates causes any
such payment not to be treated as an adjustment to Purchase Price, then the
Indemnifying Party shall indemnify the Indemnified Party for any taxes payable
by the Indemnified Party or any subsidiary by reason of the receipt of such
payment (including any payments under this Section 8.1(e)), determined at an
assumed marginal tax rate equal to the highest marginal tax rate then in effect
for corporate taxpayers in the relevant jurisdiction.
SECTION 8.2. Notices. All notices, demands, requests, consents, approvals or
other communications (collectively, "Notices") required or permitted to be given
hereunder or which are given with respect to this Agreement shall be in writing
and shall be personally served, delivered by reputable air courier service with
charges prepaid, or transmitted by hand delivery, telegram, telex or facsimile,
addressed as set forth below, or to such other address as such party shall have
specified most recently by written notice. Notice shall be deemed given on the
date of service or transmission if personally served or transmitted by telegram,
telex or facsimile. Notice otherwise sent as provided herein shall be deemed
given on the next business day following delivery of such notice to a reputable
air courier service.
To the Company:
Rhythms NetConnections Inc.
6933 South Revere Parkway
Englewood, CO 80112-3931
Attn: Catherine Hapka
Telephone: (303) 476-4200
Fax: (303) 476-5700
with a copy to:
Brobeck, Phleger & Harrison LLP
550 West C Street, Suite 1300
San Diego, CA 9210
Attn: Martin C. Nichols
Telephone: (619) 699-0254
Fax: (619) 234-3848
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<PAGE>
To the Purchasers:
To the appropriate member of the HMTF Group
c/o Hicks, Muse, Tate & Furst Incorporated
1325 Avenue of the Americas
25th Floor
New York, NY 10019
Attn: Michael J. Levitt
Telephone: (212) 424-1400
Fax: (212) 424-1450
with a copy to:
Hicks, Muse, Tate & Furst Incorporated
200 Crescent Court, Suite 1600
Dallas, Texas 75201
Attn: Lawrence D. Stuart
Telephone: (214) 740-7300
Fax: (214) 720-7888
with a copy to:
Vinson & Elkins L.L.P.
1325 Avenue of the Americas (17th Floor)
New York, NY 10019
Attention: Eric S. Shube
Telephone: (917) 206-8005
Fax: (917) 206-8100
SECTION 8.3. Governing Law. This Agreement shall be governed by, interpreted
under, and construed in accordance with the laws of the State of New York,
regardless of the laws that might otherwise govern under applicable principles
of conflicts of law thereof.
SECTION 8.4. Termination. (a) This Agreement may be terminated as between
the Company and any Purchaser (i) at any time prior to the Closing Date by
mutual written agreement of the Company and such Purchaser, (ii) if the Closing
shall not have occurred on or prior to March 31, 2000 either the Company or such
Purchaser, at any time after March 31, 2000, provided that the right to
terminate this Agreement under this Section 8.4(a)(ii) shall not be available to
any party whose failure to fulfill any obligation under this Agreement was the
cause of or resulted in the failure of the Closing to occur on or before such
date, (iii) if any Governmental Authority shall have issued a nonappealable
final order, decree or ruling or taken any other action having the effect of
permanently restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement, by either the Company or such Purchaser, (iv) if
either the Company or such Purchaser shall have breached any of its material
obligations under this Agreement, by the non-breaching party, or (v) if an event
described in Section 7.2(l) shall have occurred, by such Purchaser. Any party
desiring to terminate this Agreement pursuant to
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<PAGE>
clauses 8.4(a)(ii), (iii), (iv) or (v) shall promptly give notice of such
termination to the other party.
(b) If this Agreement is terminated as between the Company and a
Purchaser, as permitted by Section 8.4(a), such termination shall be without
liability of any party (or any stockholder, director, officer, partner,
employee, agent, consultant or representative of such party) to any other party
to this Agreement; provided that if such termination shall result from the
willful (a) failure of any party to fulfill a condition to the performance of
the obligations of the other party, (b) failure to perform a covenant of this
Agreement or (c) breach by any party hereto of any representation or warranty
contained herein, such failing or breaching party shall be fully liable for any
and all losses (excluding consequential damages) incurred or suffered by the
other party as a result of such failure or breach. The provisions of Sections
8.2, 8.3, this Section 8.4, Sections 8.5, 8.8, 8.10, 8.11, 8.12, 8.13, 8.14,
8.16, 8.17, 8.18 and 8.20 shall survive any termination hereof pursuant to
Section 8.4(a).
SECTION 8.5. Entire Agreement. As between the Company and each Purchaser
this Agreement and the other Equity Documents (including all agreements entered
into pursuant hereto and thereto and all certificates and instruments delivered
pursuant hereto and thereto) constitute the entire agreement of the parties with
respect to the subject matter hereof and supersede all prior and contemporaneous
agreements, representations, understandings, negotiations and discussions
between the parties, whether oral or written, with respect to the subject matter
hereof.
SECTION 8.6. Modifications and Amendments. No amendment, modification or
termination of this Agreement as between the Company and a Purchaser shall be
binding unless executed in writing by the Company and such Purchaser intending
to be bound thereby.
SECTION 8.7. Waivers and Extensions. Any party to this Agreement may waive
any condition, right, breach or default that such party has the right to waive,
provided that such waiver will not be effective against the waiving party unless
it is in writing, is signed by such party, and specifically refers to this
Agreement. Waivers may be made in advance or after the right waived has arisen
or the breach or default waived has occurred. Any waiver may be conditional. No
waiver of any breach of any agreement or provision herein contained shall be
deemed a waiver of any preceding or succeeding breach thereof nor of any other
agreement or provision herein contained. No waiver or extension of time for
performance of any obligations or acts shall be deemed a waiver or extension of
the time for performance of any other obligations or acts.
SECTION 8.8. Titles and Headings. Titles and headings of sections of this
Agreement are for convenience only and shall not affect the construction of any
provision of this Agreement.
SECTION 8.9. Exhibits and Schedules. Each of the exhibits and schedules
referred to herein and attached hereto is an integral part of this Agreement and
is incorporated herein by reference.
SECTION 8.10. Expenses. All costs and expenses incurred in connection with
this Agreement shall be paid by the party incurring such cost or expense;
provided, however, that (a)
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<PAGE>
the Company shall pay the filing fee payable in respect to any HSR Act filing,
and (b) if this Agreement is terminated with respect to any Purchaser for any
reason other than a breach by such Purchaser and other than the failure of the
condition set forth in Section 7.2(l)(ii) to be satisfied, then (without
limiting any party's right to recover damages pursuant to Section 8.4(b)) the
Company shall reimburse such Purchaser for such Purchaser's reasonable out-of-
pocket costs and expenses incurred in connection with this Agreement.
SECTION 8.11. Press Releases and Public Announcements. All public
announcements or disclosures relating to the Issuance or this Agreement shall be
made only if mutually agreed upon by the Company and the Purchasers, except to
the extent such disclosure is, in the opinion of counsel, required by law or by
regulation of any applicable national stock exchange or Commission recognized
trading market; provided that (a) any such required disclosure shall only be
made, to the extent consistent with law and regulation of any applicable
national stock exchange or Commission recognized trading market, after
consultation with each Purchaser and (b) no such announcement or disclosure
(except as required by law or by regulation of any applicable national stock
exchange or Commission recognized trading market) shall identify any Purchaser
without such Purchaser's prior consent.
SECTION 8.12. Assignment; No Third Party Beneficiaries. This Agreement and
the rights, duties and obligations hereunder may not be assigned or delegated by
the Company without the prior written consent of the Purchasers, and may not
assigned or delegated by any Purchaser without the Company's prior written
consent except that each Purchaser may assign any or all of its rights and
obligations under this Agreement to any one or more of its Affiliates. Any
assignment or delegation of rights, duties or obligations hereunder made by the
Company without the prior written consent of the Purchasers, shall be void and
of no effect. This Agreement and the provisions hereof shall be binding upon and
shall inure to the benefit of each of the parties and their respective
successors and permitted assigns. This Agreement is not intended to confer any
rights or benefits on any Persons other than the parties hereto, except as
expressly set forth in Section 5.2, Section 8.1, this Section 8.12 or Section
8.20.
SECTION 8.13. Severability. This Agreement shall be deemed severable, and
the invalidity or unenforceability of any term or provision hereof shall not
affect the validity or enforceability of this Agreement or of any other term or
provision hereof. Furthermore, in lieu of any such invalid or unenforceable term
or provision, the parties hereto intend that there shall be added as a part of
this Agreement a provision as similar in terms to such invalid or unenforceable
provision as may be possible and be valid and enforceable.
SECTION 8.14. Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed an original, but all of which taken together shall
constitute one and the same instrument.
SECTION 8.15. Further Assurances. As between the Company and a Purchaser,
each party hereto, upon the request of any other party hereto, shall do all such
further acts and execute, acknowledge and deliver all such further instruments
and documents as may be necessary or desirable to carry out the transactions
contemplated by this Agreement, including, in the case of the Company, such
acts, instruments and documents as may be necessary or
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<PAGE>
desirable to convey and transfer to each Purchaser the Shares and Warrants to be
purchased by it hereunder.
SECTION 8.16. Remedies Cumulative. The remedies provided herein shall be
cumulative and shall not preclude the assertion by any party hereto of any other
rights or the seeking of any remedies against the other party hereto.
SECTION 8.17. Several Liability of the Purchasers. Nothing in this Agreement
(including, without limitation, Article VI) shall be construed to impose on any
Purchaser any liability for any action or failure to act of any other Purchaser,
including any breach of this Agreement by any such other Purchaser.
SECTION 8.18. No Duty to Other Purchasers. Each Purchaser confirms with each
other Purchaser that such Purchaser has conducted its own due diligence in
connection with its investment in the Securities and the other Purchasers may
therefore have information different from, or additional to, the information
possessed by such Purchaser. In addition, although certain of such other
Purchasers (the "Supplying Purchasers") may have shared information received by
them (including information contained in third party reports prepared for such
other Purchasers) with such Purchaser, no representation or warranty is being
made with respect to such information by any Supplying Purchaser or any such
third party. Nothing in this Section 8.18 is meant to limit any duty, obligation
or liability the Company may have to any Purchaser under this Agreement or
otherwise.
SECTION 8.19. Specific Performance. The parties hereto agree that the remedy
at law for any breach of this Agreement may be inadequate, and that as between
the Company and a Purchaser any party by whom this Agreement is enforceable
shall be entitled to specific performance in addition to any other appropriate
relief or remedy. Such party may, in its sole discretion, apply to a court of
competent jurisdiction for specific performance or injunctive or such other
relief as such court may deem just and proper in order to enforce this Agreement
as between the Company and a Purchaser, or prevent any violation hereof, and, to
the extent permitted by applicable as between the Company and a Purchaser law,
each party waives any objection to the imposition of such relief.
SECTION 8.20. No Purchaser Affiliate Liability. No Purchaser Affiliate shall
have any liability or obligation of any nature whatsoever in connection with or
under this Agreement or the transactions contemplated hereby, and the Company
hereby waives and releases all claims of any such liability and obligation, it
being understood that no such Person or entity (other than Purchaser) shall be
liable for or in respect of this Agreement with the transactions contemplated
hereby.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
RHYTHMS NETCONNECTIONS INC.
By:
-------------------------------
Name: Catherine Hapka
Title: Chief Executive Officer
HMTF BRIDGE RHY, LLC
By:
-------------------------------
Name:
Title:
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<PAGE>
SCHEDULE I
Purchaser Number of Shares Number of Warrants Purchase Price
- --------- ---------------- ------------------ --------------
<PAGE>
EXHIBIT A
---------
FORM OF WARRANT
<PAGE>
EXHIBIT B
---------
CERTIFICATE OF DESIGNATION
<PAGE>
EXHIBIT C
---------
REGISTRATION RIGHTS AGREEMENT
<PAGE>
EXHIBIT D
---------
RIGHTS AGREEMENT AMENDMENT
<PAGE>
EXHIBIT E
---------
MANAGEMENT RIGHTS AGREEMENT
<PAGE>
EXHIBIT F
---------
LATIN AMERICA TERM SHEET
<PAGE>
Exhibit 10.35
Execution Copy
RHYTHMS NETCONNECTIONS INC.
(a Delaware corporation)
$300,000,000
14% Senior Notes due 2010
PURCHASE AGREEMENT
Dated: February 16, 2000
<PAGE>
TABLE OF CONTENTS
Page
----
SECTION 1. Representations and Warranties...............................2
(a) Representations and Warranties by the Company.............................2
(i) Similar Offerings............................................2
(ii) Offering Memorandum..........................................2
(iii) Independent Accountants......................................3
(iv) Financial Statements.........................................3
(v) No Material Adverse Change in Business.......................3
(vi) Good Standing of the Company.................................3
(vii) Good Standing of Designated Subsidiaries.....................4
(viii) Capitalization...............................................4
(ix) Authorization of Agreement...................................4
(x) Authorization of the Indenture...............................4
(xi) Authorization of the Registration Rights Agreement...........4
(xii) Intentionally Left Blank.....................................5
(xiii) Authorization of the Securities..............................5
(xiv) Description of the Securities and the Agreements.............5
(xv) Absence of Defaults and Conflicts............................5
(xvi) Absence of Labor Dispute.....................................6
(xvii) Absence of Proceedings.......................................6
(xviii) Possession of Intellectual Property..........................6
(xix) Absence of Further Requirements..............................7
(xx) Possession of Licenses and Permits...........................7
(xxi) Title to Property............................................9
(xxii) Tax Returns..................................................9
(xxiii) Environmental Laws...........................................9
(xxiv) Investment Company Act......................................10
(xxv) Rule 144A Eligibility.......................................10
(xxvi) No General Solicitation.....................................10
(xxvii) No Registration Required....................................10
(xxviii) Disqualified Stock..........................................11
(xxix) Insurance...................................................11
(xxx) Internal Accounting Controls................................11
(xxxi) Stabilization and Manipulation..............................11
(xxxii) Related Party Transactions..................................11
(xxxiii) Solvency....................................................11
(b) Officer's Certificates...................................................12
SECTION 2. Sale and Delivery to Initial Purchasers; Closing............12
(a) Securities...............................................................12
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<PAGE>
Page
----
(b) Payment....................................................... 12
(c) Qualified Institutional Buyer................................. 13
(d) Denominations; Registration................................... 13
SECTION 3. Covenants of the Company...................................... 13
(a) Offering Memorandum........................................... 13
(b) Notice and Effect of Material Events.......................... 13
(c) Amendment to Offering Memorandum and Supplements.............. 13
(d) Qualification of Securities for Offer and Sale................ 14
(e) DTC........................................................... 14
(f) Use of Proceeds............................................... 14
(g) Restriction on Sale of Securities............................. 14
(h) Press Releases................................................ 14
SECTION 4. Payment of Expenses........................................... 14
(a) Expenses...................................................... 14
(b) Termination of Agreement...................................... 15
SECTION 5. Conditions of Initial Purchasers' Obligations................. 15
(a) Opinions of Counsel for Company............................... 15
(b) Opinion of Counsel for Initial Purchasers..................... 15
(c) Officers' Certificate......................................... 16
(d) Accountant's Comfort Letter................................... 16
(e) Bring-down Comfort Letter..................................... 16
(f) PORTAL........................................................ 16
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<PAGE>
Page
----
(g) Registration Rights Agreements.................................. 16
(h) Additional Documents............................................ 16
(i) Termination of Agreement........................................ 17
SECTION 6. Subsequent Offers and Resales of the Securities................. 17
(a) Offer and Sale Procedures....................................... 17
(i) Offers and Sales only to Qualified Institutional Buyers......... 17
(ii) No General Solicitation......................................... 17
(iii) Purchases by Non-Bank Fiduciaries............................... 17
(iv) Subsequent Purchaser Notification............................... 17
(v) Restrictions on Transfer........................................ 18
(vi) Delivery of Offering Memorandum................................. 18
(vii) Hedging Transactions............................................ 18
(b) Covenants of the Company........................................ 18
(i) Due Diligence............................................ 18
(ii) Integration.............................................. 18
(iii) Rule 144A Information.................................... 19
(iv) Restriction on Repurchases............................... 19
(c) Resale Pursuant to Rule 144A.................................... 19
SECTION 7. Indemnification................................................. 19
(a) Indemnification of Initial Purchasers........................... 19
(b) Indemnification of Company, Directors and Officers.............. 20
(c) Actions against Parties; Notification........................... 20
(d) Settlement without Consent if Failure to Reimburse.............. 21
SECTION 8. Contribution.................................................... 21
SECTION 9. Representations, Warranties and Agreements to Survive Delivery.. 22
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<PAGE>
Page
----
SECTION 10. Termination of Agreement.................................... 23
(a) Termination; General............................................... 23
(b) Liabilities........................................................ 23
SECTION 11. Default by One or More of the Initial Purchasers............ 23
SECTION 12. Notices..................................................... 24
SECTION 13. Parties..................................................... 24
SECTION 14. Governing Law and Time...................................... 24
SECTION 15. Effect of Headings.......................................... 24
-iv-
<PAGE>
Exhibit 10.5
$300,000,000
RHYTHMS NETCONNECTIONS INC.
(a Delaware corporation)
14% Senior Notes due 2010
PURCHASE AGREEMENT
------------------
February 16, 2000
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Salomon Smith Barney Inc.
Chase Securities Inc.
Credit Suisse First Boston Corporation
as Representatives of the several Initial Purchasers
Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Ladies and Gentlemen:
Rhythms NetConnections Inc., a Delaware corporation (the "Company"),
confirms its agreement with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch") and each of the other Initial Purchasers
named in Schedule A hereto (collectively, the "Initial Purchasers", which term
shall also include any initial purchaser substituted as hereinafter provided in
Section 11 hereof), for whom Merrill Lynch, Salomon Smith Barney Inc., Chase
Securities Inc. and Credit Suisse First Boston Corporation are acting as
representatives (in such capacity, the "Representatives"), with respect to the
issue and sale by the Company and the purchase by the Initial Purchasers, acting
severally and not jointly, of the respective principal amount set forth in said
Schedule A of an aggregate of $300,000,000 of 14% Senior Notes due 2010 (the
"Securities"). The Securities are to be issued pursuant to an indenture to be
dated on or about February 23, 2000 (the "Indenture") between the Company and
State Street Bank and Trust Company of California, N.A., as trustee (the
"Trustee"). Securities issued in book-entry form will be issued to Cede & Co.
as nominee of The Depository Trust Company ("DTC") pursuant to one or more
letter agreements, to be dated as of the Closing Time (as defined in Section
2(b)) (collectively, the "DTC Agreement"), among the Company, the Trustee and
DTC.
<PAGE>
The Company understands that the Initial Purchasers propose to make an
offering of the Securities on the terms and in the manner set forth herein and
agrees that the Initial Purchasers may resell, subject to the conditions set
forth herein, all or a portion of the Securities to purchasers ("Subsequent
Purchasers") at any time after the date of this Agreement. The Securities are
to be offered and sold through the Initial Purchasers without being registered
under the Securities Act of 1933, as amended (the "1933 Act"), in reliance upon
exemptions therefrom. Pursuant to the terms of the Securities and the
Indenture, investors that acquire Securities may only resell or otherwise
transfer such Securities if such Securities are hereafter registered under the
1933 Act or if an exemption from the registration requirements of the 1933 Act
is available (including the exemption afforded by Rule 144A ("Rule 144A") or
Regulation S ("Regulation S") of the rules and regulations promulgated under the
1933 Act by the Securities and Exchange Commission (the "Commission")).
The Company has prepared and will deliver to each Initial Purchaser, on the
date hereof or the next succeeding day, copies of a final offering memorandum
dated February 16, 2000 (the "Final Offering Memorandum") for use by such
Initial Purchaser in connection with its solicitation of purchases of, or
offering of, the Securities. "Offering Memorandum" means, with respect to any
date or time referred to in this Agreement, the most recent offering memorandum
(whether the Final Offering Memorandum or any amendment or supplement thereto),
which has been prepared and delivered by the Company to the Initial Purchasers
in connection with their solicitation of purchases of, or offering of, the
Securities.
SECTION 1. Representations and Warranties.
------------------------------
(a) Representations and Warranties by the Company . The Company
represents and warrants to each Initial Purchaser as of the date hereof, and
will represent as of the Closing Time referred to in Section 2(b) hereof by
means of the certificate described in Section 5(c) hereof, and agrees with each
Initial Purchaser as follows:
(i) Similar Offerings. The Company has not, directly or
indirectly, solicited any offer to buy or offered to sell, and will not,
directly or indirectly, solicit any offer to buy or offer to sell, in the
United States or to any United States citizen or resident, any security
which is or would be integrated with the sale of the Securities in a manner
that would require the Securities to be registered under the 1933 Act.
(ii) Offering Memorandum. The Offering Memorandum does not, and at
the Closing Time will not, include an untrue statement of a material fact
or omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided that this representation, warranty and agreement shall
not apply to such statements in or omissions from the Offering Memorandum
made in reliance upon and in conformity with information furnished to the
Company in writing by any Initial Purchaser through the Representatives
expressly for use in the Offering Memorandum. It is understood that the
statements set forth in the Offering Memorandum under the heading "Plan of
Distribution" and the identity of counsel to the Initial Purchasers under
the heading
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<PAGE>
"Legal Matters" constitute the only information furnished in writing by or
on behalf of the Initial Purchasers expressly for use in the Offering
Memorandum.
(iii) Independent Accountants. The accountants who certified the
financial statements included in the Offering Memorandum are independent
certified public accountants with respect to the Company and its
subsidiaries within the meaning of Regulation S-X under the 1933 Act.
(iv) Financial Statements. The financial statements, together with
the related schedules and notes, included in the Offering Memorandum
present fairly the consolidated financial position of the Company and its
subsidiaries at the dates indicated and the statement of operations,
stockholders' equity and cash flows of the Company and its consolidated
subsidiaries for the periods specified; said financial statements have been
prepared in conformity with generally accepted accounting principles
("GAAP") applied on a consistent basis throughout the periods involved.
The selected financial data included in the Offering Memorandum present
fairly the information shown therein and have been compiled on a basis
consistent with that of the audited financial statements included in the
Offering Memorandum. The pro forma and pro forma as adjusted columns of
the selected financial data included in the Offering Memorandum and the
related notes thereto present fairly the information shown therein, have
been prepared in accordance with the Commission's rules and guidelines with
respect to pro forma financial information and have been properly compiled
on the bases described therein, and the assumptions used in the preparation
thereof are reasonable and the adjustments used therein are appropriate to
give effect to the transactions and circumstances referred to therein.
(v) No Material Adverse Change in Business. Since the respective
dates as of which information is given in the Offering Memorandum, except
as otherwise stated therein, (A) there has been no material adverse change
in the condition, financial or otherwise, or in the earnings, business
affairs or business prospects of the Company and its subsidiaries
considered as one enterprise (a "Material Adverse Effect"), whether or not
arising in the ordinary course of business, (B) there have been no
transactions entered into by the Company or any of its subsidiaries, other
than those in the ordinary course of business, which are material with
respect to the Company and its subsidiaries considered as one enterprise,
and (C) there has been no dividend or distribution of any kind declared,
paid or made by the Company on any class of its capital stock.
(vi) Good Standing of the Company. The Company has been duly
organized and is validly existing as a corporation in good standing under
the laws of the State of Delaware and has corporate power and authority to
own, lease and operate its properties and to conduct its business as
described in the Offering Memorandum and to enter into and perform its
obligations under this Agreement; and the Company is duly qualified as a
foreign corporation to transact business and is in good standing in each
other jurisdiction in which such qualification is required, whether by
reason of the ownership or leasing of
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<PAGE>
property or the conduct of business, except where the failure so to qualify
or to be in good standing would not result in a Material Adverse Effect.
(vii) Good Standing of Designated Subsidiaries. Each of the
Designated Subsidiaries has been duly organized and is validly existing as
a corporation or a public benefit corporation, as the case may be, in good
standing under the laws of the jurisdiction of its incorporation, has
corporate power and authority to own, lease and operate its properties and
to conduct its business as described in the Offering Memorandum and is duly
qualified as a foreign corporation to transact business and is in good
standing, in each jurisdiction in which such qualification is required,
whether by reason of the ownership or leasing of property or the conduct of
business, except where the failure so to qualify or to be in good standing
would not result in a Material Adverse Effect; except as otherwise
disclosed in the Offering Memorandum, all of the issued and outstanding
capital stock of each Designated Subsidiary has been duly authorized and
validly issued, is fully paid and non-assessable and is directly or
indirectly owned by the Company, free and clear of any security interest,
mortgage, pledge, lien, encumbrance, claim or equity; none of the
outstanding shares of capital stock of any Designated Subsidiary was issued
in violation of any preemptive or similar rights arising by operation of
law, or under the charter or by-laws of such Designated Subsidiary or under
any agreement to which the Company or such Designated Subsidiary is a
party. The Company has no subsidiaries other than Rhythms Links Inc.,
Rhythms Links Inc. -- Virginia, Rhythms Canada and Rhythms Europe
(collectively, the "Designated Subsidiaries").
(viii) Capitalization. The authorized, issued and outstanding
capital stock of the Company is as set forth in the Offering Memorandum in
the column entitled "Pro Forma" under the caption "Capitalization" (except
for subsequent issuances, if any, pursuant to this Agreement, pursuant to
employee benefit or stock option plans referred to in the Offering
Memorandum or pursuant to the exercise of convertible securities or options
referred to in the Offering Memorandum).
(ix) Authorization of Agreement. This Agreement has been duly
authorized, executed and delivered by the Company.
(x) Authorization of the Indenture. The Indenture has been duly
authorized by the Company and, at the Closing Time, will have been duly
executed and delivered by the Company and will constitute the valid and
binding agreement of the Company, enforceable against the Company in
accordance with its terms, except as the enforcement thereof may be limited
by bankruptcy, insolvency (including, without limitation, all laws relating
to fraudulent transfers), reorganization, moratorium or other similar laws
relating to or affecting enforcement of creditors' rights generally, or by
general principles of equity (regardless of whether enforcement is
considered in a proceeding in equity or at law).
(xi) Authorization of the Registration Rights Agreement. The
Registration Rights Agreement has been duly authorized by the Company and,
at the Closing Time,
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will have been duly executed and delivered by the Company and will
constitute the valid and binding agreement of the Company, enforceable
against the Company in accordance with its terms, except as the enforcement
thereof may be limited by bankruptcy, insolvency (including, without
limitation, all laws relating to fraudulent transfers), reorganization,
moratorium or other similar laws relating to or affecting enforcement of
creditors' rights generally, or by general principles of equity (regardless
of whether enforcement is considered in a proceeding in equity or at law).
(xii) Intentionally Left Blank.
(xiii) Authorization of the Securities. The Securities have been
duly authorized and, at the Closing Time, will have been duly executed by
the Company and, when authenticated in the manner provided for in the
Indenture and delivered against payment of the purchase price therefor will
constitute valid and binding obligations of the Company, enforceable
against the Company in accordance with their terms, except as the
enforcement thereof may be limited by bankruptcy, insolvency (including,
without limitation, all laws relating to fraudulent transfers),
reorganization, moratorium or other similar laws relating, to or affecting
enforcement of creditors' rights generally, or by general principles of
equity (regardless of whether enforcement is considered in a proceeding, in
equity or at law), and will be in the form contemplated by, and entitled to
the benefits of, the Indenture. All of the outstanding shares of capital
stock of the Company have been duly authorized and validly issued, are
fully paid and nonassessable, are not subject to any preemptive or similar
rights and have been issued in compliance with or in reliance upon an
exemption from all applicable state and federal securities laws.
(xiv) Description of the Securities and the Agreements. The
Securities, the Indenture and the Registration Rights Agreement will
conform in all material respects to the respective statements relating
thereto contained in the Offering Memorandum and will be in substantially
the respective forms previously delivered to the Initial Purchasers.
(xv) Absence of Defaults and Conflicts. Neither the Company nor
any of its subsidiaries is in violation of its charter or by-laws or in
default in the performance or observance of any obligation, agreement,
covenant or condition contained in any contract, indenture, mortgage, deed
of trust, loan or credit agreement, note, lease or other agreement or
instrument to which the Company or any of its subsidiaries is a party or by
which any of them may be bound, or to which any of the property or assets
of the Company or any of its subsidiaries is subject (collectively,
"Agreements and Instruments") except for such defaults that would not
result in a Material Adverse Effect, and the execution, delivery and
performance of this Agreement, the Indenture, the Registration Rights
Agreement and the Securities and any other agreement or instrument entered
into or issued or to be entered into or issued by the Company in connection
with the transactions contemplated hereby or thereby or in the Offering
Memorandum and the consummation of the transactions contemplated herein and
in the Offering Memorandum (including the issuance and sale of the
Securities and the use of the proceeds from the
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<PAGE>
sale of the Securities as described in the Offering Memorandum under the
caption "Use of Proceeds") and compliance by the Company with its
obligations hereunder have been duly authorized by all necessary corporate
action and do not and will not, whether with or without the giving of
notice or passage of time or both, conflict with or constitute a breach of,
default or a Repayment Event (as defined below) under, or result in the
creation or imposition of any lien, charge or encumbrance upon any property
or assets of the Company or any of its subsidiaries pursuant to, the
Agreements and Instruments except for such conflicts, breaches or defaults
or liens, charges or encumbrances that, singly or in the aggregate, would
not result in a Material Adverse Effect, nor will such action result in any
violation of the provisions of the charter or by-laws of the Company or any
of its subsidiaries or any applicable law, statute, rule, regulation,
judgment, order, writ or decree of any government, government
instrumentality or court, domestic or foreign, having jurisdiction over the
Company or any of its subsidiaries or any of their assets or properties. As
used herein, a "Repayment Event" means any event or condition which gives
the holder of any note, debenture, other evidence of indebtedness or
preferred stock (or any person acting on such holder's behalf) the right to
require the repurchase, redemption or repayment of all or a portion of such
indebtedness or preferred stock by the Company or any of its subsidiaries.
(xvi) Absence of Labor Dispute. No labor dispute with the
employees of the Company or any of its subsidiaries exists or, to the
knowledge of the Company, is imminent, and the Company is not aware of any
existing or imminent labor disturbance by the employees of any of its or
any of its subsidiaries' principal suppliers, manufacturers, customers or
contractors, which, in either case, may reasonably be expected to result in
a Material Adverse Effect.
(xvii) Absence of Proceedings. Except as disclosed in the Offering
Memorandum, there is no action, suit, proceeding, inquiry or investigation
before or by any court or governmental agency or body, domestic or foreign,
now pending, or, to the knowledge of the Company, threatened, against or
affecting the Company or any subsidiary thereof which might reasonably be
expected to result in a Material Adverse Effect, or which might reasonably
be expected to materially and adversely affect the properties or assets of
the Company or any of its subsidiaries or the consummation of this
Agreement or the performance by the Company of its obligations hereunder.
The aggregate of all pending legal or governmental proceedings to which the
Company or any subsidiary thereof is a party or of which any of their
respective property or assets is the subject which are not described in the
Offering Memorandum, including ordinary routine litigation incidental to
the business, could not reasonably be expected to result in a Material
Adverse Effect.
(xviii) Possession of Intellectual Property. Except as disclosed
in the Offering Memorandum, (A) the Company and its subsidiaries own or
possess, or can acquire on reasonable terms, adequate patents, patent
rights, licenses, inventions, copyrights, know-how (including trade secrets
and other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures), trademarks, service marks,
trade
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<PAGE>
names or other intellectual property (collectively, "Intellectual
Property") necessary to carry on the business now operated by them, except
that the Company and its subsidiaries may fail to so own, possess or have
the ability to acquire on reasonable terms any Intellectual Property if
such failure would not result, singly or in the aggregate, in a Material
Adverse Effect, and (B) neither the Company nor any of its subsidiaries has
received any notice or is otherwise aware of any infringement of or
conflict with asserted rights of others with respect to any Intellectual
Property or of any facts or circumstances which would render any
Intellectual Property invalid or inadequate to protect the interest of the
Company or any of its subsidiaries therein, and which infringement or
conflict (if the subject of any unfavorable decision, ruling or finding) or
invalidity or inadequacy, singly or in the aggregate, would result in a
Material Adverse Effect.
(xix) Absence of Further Requirements. No filing with, or
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or agency
is necessary or required for the performance by the Company of its
obligations hereunder, in connection with the offering, issuance or sale of
the Securities hereunder or the consummation of the transactions
contemplated by this Agreement, except as may be required under the 1933
Act or state securities or "blue sky" laws in connection with the Exchange
Offer (as defined in the Offering Memorandum).
(xx) Possession of Licenses and Permits. Except as disclosed in
the Offering Memorandum, the Company and its subsidiaries possess such
permits, licenses, approvals, consents and other authorizations issued by
the appropriate federal, state, local or foreign regulatory agencies or
bodies necessary to conduct the business now operated by them
(collectively, "Governmental Licenses"); the Company and its subsidiaries
are in compliance with the terms and conditions of all such Governmental
Licenses, except where the failure so to comply would not, singly or in the
aggregate, have a Material Adverse Effect; all of the Governmental Licenses
are valid and in full force and effect, except where the invalidity of such
Governmental Licenses or the failure of such Governmental Licenses to be in
full force and effect would not have a Material Adverse Effect; and neither
the Company nor any of its subsidiaries has received any notice of
proceedings relating to the revocation or modification of any such
Governmental Licenses which, singly or in the aggregate, if the subject of
an unfavorable decision, ruling or finding, would result in a Material
Adverse Effect. The Company has not been informed of any fact, event or
circumstance that is reasonably likely to impair the Company's (or its
subsidiaries') ability to obtain any Governmental Licenses necessary or
advisable in order to effectuate the Company's future plans and strategies
described in the Offering Memorandum and no event exists that permits, or
after notice or lapse of time or both, would permit, revocation or
termination of any Governmental License or result in any impairment of
rights of the Company or any of its subsidiaries under any such
Governmental Licenses. Without limiting the generality of this paragraph
(xx):
(A) the Company and each of its subsidiaries hold all
telecommunications regulatory licenses, permits, authorizations,
consents and
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<PAGE>
approvals (the "Telecommunications Licenses") required from the
Federal Communications Commission (the "FCC") for the Company and its
subsidiaries to conduct their business on and as of the date hereof in
the manner described in the Offering Memorandum, except as would not
have, individually or in the aggregate, a Material Adverse Effect; the
Telecommunications Licenses have been duly and validly issued and are
in full force and effect, except where the failure to be in full force
and effect would not have, individually or in the aggregate, a
Material Adverse Effect; no proceedings to revoke or restrict the
Telecommunications Licenses are pending or, to the best of the
Company's knowledge, threatened; neither the Company nor its
subsidiaries are in violation of any of the terms and conditions of
any of the Telecommunications Licenses, are in violation of the
Communications Act of 1934, as amended (the "Communications Act"), or
are in violation of any FCC rules and regulations, or state regulatory
laws, rules or regulations, except as would not have, individually or
in the aggregate, a Material Adverse Effect; and the Company and its
subsidiaries have in effect with the FCC all international and
domestic service tariffs necessary to conduct their business on and as
of the date hereof in the manner described in the Offering Memorandum
except as would not have, individually or in the aggregate, a Material
Adverse Effect;
(B) the Company and its subsidiaries have obtained all state
and municipal Telecommunications Licenses and filed all tariffs
required for the provision of telecommunications services in any state
to conduct their business on and as of the date hereof in the manner
described in the Offering Memorandum, except where the failure to do
so would not have, individually or in the aggregate, a Material
Adverse Effect;
(C) there is no outstanding adverse judgment, injunction,
decree or order that has been issued by the FCC or any state utility
commission or similar state agency ("PUC") or municipality against the
Company or its subsidiaries or any action, proceeding or investigation
pending before the FCC or any state PUC or municipality, or, to the
Company's knowledge, threatened by the FCC or any state PUC or
municipality against the Company or its subsidiaries which, if the
subject of any unfavorable decision, ruling or finding, would have a
Material Adverse Effect on the Company or its subsidiaries;
(D) no license, permit, consent, approval, order or
authorization of, or filing with, the FCC or with any state PUC or
municipal authority on the part of the Company or its subsidiaries is
required in connection with the issuance or sale of the Securities;
(E) neither the issuance and sale of the Securities nor the
performance by the Company or its subsidiaries of their obligations
under this Agreement, the Registration Rights Agreements or the
Indenture will result in a violation in any material respect of: (1)
the Communications Act or the applicable rules or
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<PAGE>
regulations, or any order, writ, judgment, injunction, decree or award
of the FCC binding on the Company or its subsidiaries; (2) any state
telecommunications laws or any applicable state PUC rules or
regulations, or any order, writ, judgment, injunction, decree or award
of any state PUC binding on the Company or its subsidiaries; (3) any
municipal rules or regulations applicable to the Company or its
subsidiaries; or (4) the Governmental Licenses; and
(F) the Governmental Licenses do not have an expiration
date or are renewable by their terms or in the ordinary course of
business without the need to comply with any qualification procedures
not generally applicable to the renewal of Governmental Licenses or to
pay any amounts other than routine filing fees.
(xxi) Title to Property. The Company and its subsidiaries have
good and marketable title to all real property owned by the Company and its
subsidiaries and good title to all other properties owned by them, in each
case, free and clear of all mortgages, pledges, liens, security interests,
claims, restrictions or encumbrances of any kind except such as (a) are
described in the Offering Memorandum or (b) do not, singly or in the
aggregate, materially affect the value of such property and do not
interfere with the use made and proposed to be made of such property by the
Company or any of its subsidiaries; and all of the leases and subleases
material to the business of the Company and its subsidiaries, considered as
one enterprise, and under which the Company or any of its subsidiaries
holds properties described in the Offering Memorandum, are in full force
and effect, and neither the Company nor any of its subsidiaries has any
notice of any material claim of any sort that has been asserted by anyone
adverse to the rights of the Company or any of its subsidiaries under any
of the leases or subleases mentioned above, or affecting or questioning the
rights of the Company or any subsidiary thereof to the continued possession
of the leased or subleased premises under any such lease or sublease.
(xxii) Tax Returns. The Company and its subsidiaries have filed
all federal, state, local and foreign tax returns that are required to be
filed or have duly requested extensions thereof and have paid all taxes
required to be paid by any of them and any related assessments, fines or
penalties, except for any such tax, assessment, fine or penalty that is
being contested in good faith and by appropriate proceedings, and adequate
charges, accruals and reserves have been provided for in the financial
statements referred to in Section l(a)(v) above in respect of all federal,
state, local and foreign taxes for all periods as to which the tax
liability of the Company or any of its subsidiaries has not been finally
determined or remains open to examination by applicable taxing authorities,
except for such failures to file, request extensions, make payments and
provide for adequate charges, accruals and reserves as would not, singly or
in the aggregate, result in a Material Adverse Effect.
(xxiii) Environmental Laws. Except as described in the Offering
Memorandum and except such matters as would not, singly or in the
aggregate, result in a Material Adverse Effect, (A) neither the Company nor
any of its subsidiaries is in violation of any
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<PAGE>
federal, state, local or foreign statute, law, rule, regulation, ordinance,
code, policy or rule of common law or any judicial or administrative
interpretation thereof, including any judicial or administrative order,
consent, decree or judgment, relating to pollution or protection of human
health, the environment (including, without limitation, ambient air,
surface water, groundwater, land surface or subsurface strata) or wildlife,
including, without limitation, laws and regulations relating to the release
or threatened release of chemicals, pollutants, contaminants, wastes, toxic
substances, hazardous substances, petroleum or petroleum products
(collectively, "Hazardous Materials") or to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
Hazardous Materials (collectively, "Environmental Laws"), (B) the Company
and its subsidiaries have all permits, authorizations and approvals
required under any applicable Environmental Laws and are each in compliance
with their requirements, (C) there are no pending or threatened
administrative, regulatory or judicial actions, suits, demands, demand
letters, claims, liens, notices of noncompliance or violation,
investigation or proceedings relating to any Environmental Law against the
Company or any of its subsidiaries and (D) there are no events or
circumstances that might reasonably be expected to form the basis of an
order for clean-up or remediation, or an action, suit or proceeding by any
private party or governmental body or agency, against or affecting the
Company or any of its subsidiaries relating to Hazardous Materials or
Environmental Laws.
(xxiv) Investment Company Act. The Company is not, and upon the
issuance and sale of the Securities as herein contemplated and the
application of the net proceeds therefrom as described in the Offering
Memorandum will not be, an "investment company" or an entity "controlled"
by an "investment company" as such terms are defined in the Investment
Company Act of 1940, as amended (the "1940 Act").
(xxv) Rule 144A Eligibility. The Securities are eligible for resale
pursuant to Rule 144A and will not be, at the Closing Time, of the same
class as securities listed on a national securities exchange registered
under Section 6 of the 1934 Act, or quoted in a U.S. automated interdealer
quotation system.
(xxvi) No General Solicitation. None of the Company, its
affiliates, as such term is defined in Rule 501(b) under the 1933 Act
("Affiliates"), or any person acting on its or any of their behalf (other
than the Initial Purchasers, as to whom the Company makes no
representation) has engaged or will engage, in connection with the offering
of the Securities, in any form of general solicitation or general
advertising within the meaning of Rule 502(c) under the 1933 Act.
(xxvii) No Registration Required. Subject to compliance by the
Initial Purchasers with the representations and warranties set forth in
Section 2 and the procedures set forth in Section 6 hereof, it is not
necessary in connection with the offer, sale and delivery of the Securities
to the Initial Purchasers and to each Subsequent Purchaser in the manner
contemplated by this Agreement and the Offering Memorandum to register the
Securities
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<PAGE>
under the 1933 Act or to qualify the Indenture under the Trust Indenture
Act of 1939, as amended (the "1939 Act").
(xxviii) Disqualified Stock. The Company's 8.25% Series E
Convertible Preferred Stock due 2015 ("Series E Preferred Stock") is not
"Disqualified Stock" within the meaning of the Indentures dated as of May
5, 1998 and April 23, 1999 between the Company and State Street Bank and
Trust Company of California, N.A.
(xxix) Insurance. The Company and each of its subsidiaries
maintains insurance covering its properties, operations, personnel and
business. Such insurance insures against such losses and risks as are
adequate in accordance with customary industry practice to protect the
Company, each of its subsidiaries and their businesses. Neither the
Company or any of its subsidiaries has received notice from any insurer or
agent of such insurer that substantial capital improvement or other
expenditures will have to be made in order to continue such insurance. All
such insurance is outstanding and duly in force on the date hereof.
(xxx) Internal Accounting Controls. The Company maintains a
system of internal accounting controls sufficient to provide reasonable
assurances that (a) transactions are executed in accordance with
management's general or specific authorization; (b) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain
accountability for assets; (c) access to assets is permitted only in
accordance with management's general or specific authorization; and (d) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(xxxi) Stabilization and Manipulation. None of the Company or any
of its subsidiaries has (a) taken, directly or indirectly, any action
designed to, or that might reasonably be expected to, cause or result in
stabilization or manipulation of the price of any security of the Company
to facilitate the sale or resale of the Securities or (b) since the date of
the Offering Memorandum (I) sold, bid for, purchased or paid any person any
compensation for soliciting purchases of, the Securities or (II) paid or
agreed to pay to any person any compensation for soliciting another to
purchase any securities of the Company.
(xxxii) Related Party Transactions. Except as disclosed in the
Offering Memorandum, there are no business relationships or related party
transactions required to be disclosed therein pursuant to Item 404 of
Regulation S-K of the Commission (assuming for purposes of this paragraph
(xxxii) that Regulation S-K is applicable to the Offering Memorandum).
(xxxiii) Solvency. The Company is, and immediately after the
Closing Time will be, Solvent. As used herein, the term "Solvent" means,
with respect to the Company on a particular date, that on such date (A) the
fair market value of the assets of the Company is
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greater than the total amount of liabilities (including contingent
liabilities) of the Company, (B) the present fair salable value of the
assets of the Company is greater than the amount that will be required to
pay the probable liabilities of the Company on its debts as they become
absolute and mature, (C) the Company is able to realize upon its assets and
pay its debts and other liabilities, including contingent obligations, as
they mature, and (D) the Company does not have unreasonably small capital.
(b) Officer's Certificates. Any certificate signed by any officer of
the Company or any of its subsidiaries delivered to the Representatives or to
counsel for the Initial Purchasers shall be deemed a representation and warranty
by the Company to each Initial Purchaser as to the matters covered thereby.
SECTION 2. Sale and Delivery to Initial Purchasers; Closing .
(a) Securities. On the basis of the representations and warranties
herein contained and subject to the terms and conditions herein set forth, the
Company agrees to sell to each Initial Purchaser, severally and not jointly, and
each Initial Purchaser, severally and not jointly, agrees to purchase from the
Company, at the price set forth in Schedule B, the principal amount of
Securities set forth in Schedule A opposite the name of such Initial Purchaser,
plus any additional principal amount of Securities which such Initial Purchaser
may become obligated to purchase pursuant to the provisions of Section 11
hereof.
(b) Payment. Payment of the purchase price for, and delivery of
certificates for, the Securities shall be made at the office of Baker &
McKenzie, 805 Third Avenue, New York, New York 10022, or at such other place as
shall be agreed upon by the Representatives and the Company, at 10:00 A.M. on
the fourth business day after the date hereof (unless postponed in accordance
with the provisions of Section 11), or such other time not later than ten
business days after such date as shall be agreed upon by the Representatives and
the Company (such time and date of payment and delivery being herein called the
"Closing Time").
Payment shall be made to the Company by wire transfer of immediately
available funds to a bank account designated by the Company against delivery to
the Representatives for the respective accounts of the Initial Purchasers of
certificates for the Securities to be purchased by them. It is understood that
each Initial Purchaser has authorized the Representatives, for its account, to
accept delivery of, receipt for, and make payment of the purchase price for, the
Securities which it has agreed to purchase. Merrill Lynch, individually and not
as representative of the Initial Purchasers, may (but shall not be obligated to)
make payment of the purchase price for the Securities to be purchased by any
Initial Purchaser whose funds have not been received by the Closing Time, but
such payment shall not relieve such Initial Purchaser from its obligations
hereunder. The certificates representing the Securities shall be registered in
the name of Cede & Co. pursuant to the DTC Agreement and shall be made available
for examination and packaging by the Initial Purchasers in The City of New York
not later than 10:00 A.M. on the last business day prior to the Closing Time.
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(c) Qualified Institutional Buyer. Each Initial Purchaser severally and
not jointly represents and warrants to, and agrees with, the Company that, as of
the date hereof and as of the Closing Date, it is a "qualified institutional
buyer" within the meaning of Rule 144A under the 1933 Act (a "Qualified
Institutional Buyer") and an "accredited investor" within the meaning of Rule
501(a) under the 1933 Act (an "Accredited Investor").
(d) Denominations; Registration. Certificates for the Securities shall
be in such denominations and registered in such names as the Representatives may
request in writing at least one full business day before the Closing Time.
SECTION 3. Covenants of the Company. The Company covenants with each
Initial Purchaser as follows:
(a) Offering Memorandum. The Company, as promptly as possible, will
furnish to each Initial Purchaser, without charge, such number of copies of the
Final Offering Memorandum and any amendments and supplements thereto and
documents incorporated by reference therein as such Initial Purchaser may
reasonably request.
(b) Notice and Effect of Material Events. The Company will immediately
notify each Initial Purchaser, and confirm such notice in writing, of (x) any
filing made by the Company of information relating to the offering of the
Securities with any securities exchange or any other regulatory body in the
United States or any other jurisdiction, and (y) prior to the completion of the
placement of the Securities by the Initial Purchasers as evidenced by a notice
in writing from the Initial Purchasers to the Company, any material changes in
or affecting the earnings, business affairs or business prospects of the Company
and its subsidiaries which (i) make any statement in the Offering Memorandum
false or misleading or (ii) are not disclosed in the Offering Memorandum. In
such event or if during such time any event shall occur as a result of which it
is necessary, in the reasonable opinion of the Company, its counsel, the Initial
Purchasers or counsel for the Initial Purchasers, to amend or supplement the
Final Offering Memorandum in order that the Final Offering Memorandum not
include any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein not misleading in the light of
the circumstances then existing, the Company will forthwith amend or supplement
the Final Offering Memorandum by preparing and furnishing to each Initial
Purchaser an amendment or amendments of, or a supplement or supplements to, the
Final Offering Memorandum (in form and substance satisfactory in the reasonable
opinion of counsel for the Initial Purchasers) so that, as so amended or
supplemented, the Final Offering Memorandum will not include an untrue statement
of a material fact or omit to state a material fact necessary in order to make
the statements therein, in the light of the circumstances existing at the time
it is delivered to a Subsequent Purchaser, not misleading.
(c) Amendment to Offering Memorandum and Supplements. The Company will
advise each initial Purchaser promptly of any proposal to amend or supplement
the Offering Memorandum and will not effect such amendment or supplement without
the consent of the Initial Purchasers. Neither the consent of the Initial
Purchasers, nor the Initial Purchasers'
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delivery of any such amendment or supplement, shall constitute a waiver of any
of the conditions set forth in Section 5 hereof.
(d) Qualification of Securities for Offer and Sale. The Company will
use its best efforts, in cooperation with the Initial Purchasers, to qualify the
Securities for offering and sale by the Initial Purchasers to any Subsequent
Purchasers under the applicable securities laws of such jurisdictions as the
Representatives may reasonably designate and will maintain such qualifications
in effect as long as required for the sale of the Securities; provided, however,
that the Company shall not be obligated to file any general consent to service
of process or to qualify as a foreign corporation or as a dealer in securities
in any jurisdiction in which it is not so qualified or to subject itself to
taxation in respect of doing business in any jurisdiction in which it is not
otherwise so subject.
(e) DTC. The Company will cooperate with the Representatives and use
its best efforts to permit the Securities to be eligible for clearance and
settlement through the facilities of DTC.
(f) Use of Proceeds. The Company will use the net proceeds received by
it from the sale of the Securities in the manner specified in the Offering
Memorandum under "Use of Proceeds".
(g) Restriction on Sale of Securities. During a period of 180 days from
the date of the Offering Memorandum, the Company will not, without the prior
written consent of Merrill Lynch, directly or indirectly, issue, sell, offer or
agree to sell, grant any option for the sale of, or otherwise dispose of, any
other debt securities of the Company or securities of the Company that are
convertible into, or exchangeable for, the Securities or such other debt
securities.
(h) Press Releases. From the date hereof to the Closing Time, without
the prior consent of the Initial Purchasers, the Company will not issue directly
or indirectly any press release or other public communication or hold any press
conference with respect to the Company or the business, financial condition,
assets, results of operations or prospects of the Company, unless in the
judgment of the Company and its counsel, and after notification to the Initial
Purchasers, such press release, communication or conference is required by law.
SECTION 4. Payment of Expenses.
-------------------
(a) Expenses. The Company will pay all expenses incident to the
performance of its obligations under this Agreement, including (i) the
preparation, printing and any filing of the Offering Memorandum (including
financial statements and any schedules or exhibits and any document incorporated
therein by reference) and of each amendment or supplement thereto, (ii) the
preparation, printing and delivery to the Initial Purchasers of this Agreement
and any Agreement among Initial Purchasers, the Indenture and such other
documents as may be required in connection with the offering, purchase, sale and
delivery of the Securities, (iii) the preparation, issuance and delivery of the
certificates for the Securities to the Initial Purchasers, including any charges
of DTC in connection therewith, (iv) the fees and disbursements of the Company's
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counsel, accountants and other advisors, (v) the qualification of the Securities
under securities laws in accordance with the provisions of Section 3(e) hereof,
including filing fees and the reasonable fees and disbursements of counsel for
the Initial Purchasers in connection therewith and in connection with the
preparation of the Blue Sky Survey, any supplement thereto and any Legal
Investment Survey, which amounts shall not exceed $2,500, (vi) the fees and
expenses of the Trustee, including the fees and disbursements of counsel for the
Trustee in connection with the Indenture and the Securities, (vii) any fees
payable in connection with the rating of the Securities and (viii) any fees
payable to the review by the National Association of Securities Dealers, Inc.
(the "NASD") in connection with the initial and continued designation of the
Securities as PORTAL securities under the PORTAL Market Rules pursuant to NASD
Rule 5322.
(b) Termination of Agreement. If this Agreement is terminated by the
Representatives in accordance with the provisions of Section 5 or Section
10(a)(i) hereof, the Company shall reimburse the Initial Purchasers for all of
their out-of-pocket expenses, including the reasonable fees and disbursements of
counsel for the Initial Purchasers.
SECTION 5. Conditions of Initial Purchasers' Obligations. The
obligations of the several Initial Purchasers hereunder are subject to the
accuracy of the representations and warranties of the Company contained in
Section 1 hereof or in certificates of any officer of the Company or any of its
subsidiaries delivered pursuant to the provisions hereof, to the performance by
the Company of its covenants and other obligations hereunder, and to the
following further conditions:
(a) Opinions of Counsel for Company. At the Closing Time, the
Representatives shall have received the opinions, dated as of the Closing Time,
together with signed or reproduced copies of such letters for each of the other
Initial Purchasers, (i) of Brobeck, Phleger & Harrison LLP, counsel for the
Company, to the effect set forth in Exhibit A-1 hereto, (ii) of Hale and Dorr
LLP, counsel for the Company, to the effect set forth in Exhibit A-2 hereto,
(iii) of Blumenfeld & Cohen, counsel for the Company, to the effect set forth in
Exhibit A-3 hereto, (iv) of Leboeuf, Lamb, Greene & MacRae L.L.P., counsel for
the Company, to the effect set forth on Exhibit A-4 hereto and (v) of Jeffrey
Blumenfeld, General Counsel of the Company, to the effect set forth on Exhibit
A-5 hereto. In giving the opinion described in clause (i) above such counsel
may rely, as to all matters governed by the laws of jurisdictions other than the
law of the State of New York, the federal law of the United States and the
General Corporation Law of the State of Delaware, upon the opinions of counsel
satisfactory to the Representatives.
(b) Opinion of Counsel for Initial Purchasers. At the Closing Time, the
Representatives shall have received the favorable opinion, dated as of the
Closing Time, of Baker & McKenzie, counsel for the Initial Purchasers, together
with signed or reproduced copies of such letter for each of the other Initial
Purchasers, substantially to the effect set forth in Exhibit A-6 hereto. In
giving such opinion such counsel may rely, as to all matters governed by the
laws of jurisdictions other than the law of the State of New York, the federal
law of the United States and the General Corporation Law of the State of
Delaware, upon the opinions of counsel satisfactory to the Representatives.
-15-
<PAGE>
(c) Officers' Certificate. At the Closing Time, there shall not have
been, since the date hereof or since the respective dates as of which
information is given in the Offering Memorandum, any material adverse change in
the condition, financial or otherwise, or in the earnings, business affairs or
business prospects of the Company and its subsidiaries considered as one
enterprise, whether or not arising in the ordinary course of business, and the
Representatives shall have received a certificate of the President or a Vice
President of the Company and of the chief financial or chief accounting officer
of the Company, dated as of the Closing Time, to the effect that (i) there has
been no such material adverse change, (ii) the representations and warranties in
Section 1 hereof are true and correct with the same force and effect as though
expressly made at and as of the Closing Time, and (iii) the Company has complied
with all agreements and satisfied all conditions on its part to be performed or
satisfied at or prior to the Closing Time.
(d) Accountant's Comfort Letter. At the time of the execution of this
Agreement, the Representatives shall have received from PricewaterhouseCoopers
LLP a letter dated such date, in form and substance satisfactory to the
Representatives, together with signed or reproduced copies of such letter for
each of the other Initial Purchasers containing statements and information of
the type ordinarily included in accountants' "comfort letters" to Initial
Purchasers with respect to the financial statements and certain financial
information contained in the Offering Memorandum.
(e) Bring-down Comfort Letter. At the Closing Time, the
Representatives shall have received from PricewaterhouseCoopers LLP a letter,
dated as of the Closing Time, to the effect that they reaffirm the statements
made in the letter furnished pursuant to subsection (d) of this Section, except
that the specified date referred to shall be a date not more than three business
days prior to the Closing Time.
(f) PORTAL. At the Closing Time, the Securities shall have been
designated for trading on PORTAL.
(g) Registration Rights Agreements. The Issuer and the Initial
Purchasers shall have entered into a registration rights agreement (the
"Registration Rights Agreement"), dated as of the Closing Time, substantially in
form and substance as described in the Offering Memorandum under the heading
"Description of the Notes--Exchange Offer; Registration Rights."
(h) Additional Documents. At the Closing Time, counsel for the Initial
Purchasers shall have been furnished with such other documents and opinions as
they may reasonably require for the purpose of enabling them to pass upon the
issuance and sale of the Securities as herein contemplated, or in order to
evidence the accuracy of any of the representations or warranties, or the
fulfillment of any of the conditions, herein contained; and all proceedings
taken by the Company in connection with the issuance and sale of the Securities
as herein contemplated shall be satisfactory in form and substance to the
Representatives and counsel for the Initial Purchasers.
-16-
<PAGE>
(i) Termination of Agreement. If any condition specified in this Section
shall not have been fulfilled when and as required to be fulfilled, this
Agreement may be terminated by the Representatives by notice to the Company at
any time at or prior to the Closing Time, and such termination shall be without
liability of any party to any other party except as provided in Section 4 and
except that Sections 1, 7 and 8 shall survive any such termination and remain in
full force and effect.
SECTION 6. Subsequent Offers and Resales of the Securities.
(a) Offer and Sale Procedures. Each of the Initial Purchasers and the
Company hereby acknowledge and agree to observe the following procedures in
connection with the offer and sale of the Securities:
(i) Offers and Sales only to Qualified Institutional Buyers
Offers and sales of the Securities will be made only by the Initial
Purchasers or Affiliates thereof qualified to do so in the jurisdictions in
which such offers or sales are made. Each such offer or sale shall only be
made to persons whom the offeror or seller reasonably believes to be
qualified institutional buyers (as defined in Rule 144A under the
Securities Act).
(ii) No General Solicitation. The Securities will be offered by
approaching prospective Subsequent Purchasers on an individual basis. No
general solicitation or general advertising (within the meaning of Rule
502(c) under the 1933 Act) will be used in the United States in connection
with the offering of the Securities.
(iii) Purchases by Non-Bank Fiduciaries. In the case of a non-bank
Subsequent Purchaser of a Security acting as a fiduciary for one or more
third parties, in connection with an offer and sale to such purchaser
pursuant to clause (a) above, each third party shall, in the judgment of
the applicable Initial Purchaser, be an Institutional Accredited Investor
or a Qualified Institutional Buyer or a non-U.S. person outside the United
States.
(iv) Subsequent Purchaser Notification. Each Initial Purchaser
will take reasonable steps to inform, and cause each of its U.S. Affiliates
to take reasonable steps to inform, persons acquiring Securities from such
Initial Purchaser or Affiliate, as the case may be, in the United States
that the Securities (A) have not been and will not be registered under the
1933 Act and have not been registered under any state securities laws, (B)
are being sold to them without registration under the 1933 Act in reliance
on Rule 144A or in accordance with another exemption from registration
under the 1933 Act, as the case may be, and (C) may not be offered, sold or
otherwise transferred except (1) to the Company, (2) outside the United
States in accordance with Rule 904 of Regulation S, or (3) inside the
United States in accordance with (x) Rule 144A to a person whom the seller
reasonably believes is a Qualified Institutional Buyer that is purchasing
such Securities for its own account or for the account of a Qualified
Institutional Buyer to whom notice is given that the offer, sale or
transfer is being made
-17-
<PAGE>
in reliance on Rule 144A or (y) the exemption from registration under the
1933 Act provided by Rule 144, if available.
(v) Restrictions on Transfer. The transfer restrictions and the
other provisions set forth in Section 3.17 of the Indenture, including the
legends required thereby, shall apply to the Securities except as otherwise
agreed by the Company and the Initial Purchasers. The Company shall refuse
to register any transfer of securities not made in accordance with
Regulation S under the Securities Act, pursuant to registration under the
Securities Act, or pursuant to an available exemption from such
registration. Following the sale of the Securities by the Initial
Purchasers to Subsequent Purchasers pursuant to the terms hereof, the
Initial Purchasers shall not be liable or responsible to the Company for
any losses, damages or liabilities suffered or incurred by the Company,
including any losses, damages or liabilities under the 1933 Act, arising
from or relating to any resale or transfer by any Subsequent Purchaser of
any Security; provided, that nothing contained in this sentence shall limit
the Initial Purchasers' rights and obligations under Section 7 hereof.
(vi) Delivery of Offering Memorandum. Each Initial Purchaser will
deliver to each purchaser of the Securities from such Initial Purchaser, in
connection with its original distribution of the Securities, a copy of the
Offering Memorandum, as amended and supplemented at the date of such
delivery.
(vii) Hedging Transactions. The Initial Purchasers will not engage
in hedging transactions with respect to the Securities prior to the
expiration of the applicable distribution compliance period specified in
Rule 903 of Regulation S under the Securities Act, unless in compliance
with the Securities Act.
(b) Covenants of the Company. The Company covenants with each Initial
Purchaser as follows:
(i) Due Diligence. In connection with the original distribution of
the Securities, the Company agrees that, prior to any offer or resale of
the Securities by the Initial Purchasers, the Initial Purchasers and
counsel for the Initial Purchasers shall have the right to make reasonable
inquiries into the business of the Company and its subsidiaries. The
Company also agrees to provide answers to each prospective Subsequent
Purchaser of Securities who so requests concerning the Company and its
subsidiaries (to the extent that such information is available or can be
acquired and made available to prospective Subsequent Purchasers without
unreasonable effort or expense and to the extent the provision thereof is
not prohibited by applicable law) and the terms and conditions of the
offering of the Securities, as provided in the Offering Memorandum.
(ii) Integration. The Company agrees that it will not and will
cause its Affiliates not to make any offer or sale of securities of the
Company of any class if, as a result of the doctrine of "integration"
referred to in Rule 502 under the 1933 Act, such
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<PAGE>
offer or sale would render invalid (for the purpose of (i) the sale of the
Securities by the Company to the Initial Purchasers, (ii) the resale of the
Securities by the Initial Purchasers to Subsequent Purchasers or (iii) the
resale of the Securities by such Subsequent Purchasers to others, in each
case in accordance with the terms and conditions herein set forth) the
exemption from the registration requirements of the 1933 Act provided by
Section 4(2) thereof or by Rule 144A or by Regulation S thereunder or
otherwise.
(iii) Rule 144A Information. The Company agrees that, in order to
render the Securities eligible for resale pursuant to Rule 144A under the
1933 Act, while any of the Securities remain outstanding, it will make
available, upon request, to any holder of Securities or prospective
purchasers of Securities the information specified in Rule 144A(d)(4),
unless the Company furnishes information to the Commission pursuant to
Section 13 or 15(d) of the 1934 Act (such information, whether made
available to holders or prospective purchasers or furnished to the
Commission, is herein referred to as "Additional Information").
(iv) Restriction on Repurchases. Until the expiration of three
years after the original issuance of the Securities, the Company will not,
and will cause its Affiliates not to, purchase or agree to purchase or
otherwise acquire any Securities which are "restricted securities" (as such
term is defined under Rule 144(a)(3) under the 1933 Act), whether as
beneficial owner or otherwise (except as agent acting as a securities
broker on behalf of and for the account of customers in the ordinary course
of business in unsolicited broker's transactions) unless, immediately upon
any such purchase, the Company or any Affiliate shall submit such
Securities to the Trustee for cancellation.
(c) Resale Pursuant to Rule 144A. Each Initial Purchaser represents and
agrees, that, except as permitted by Section 6(a) above, it has offered and sold
Securities and will offer and sell Securities as part of their distribution at
any time, only in accordance with Rule 144A under the 1933 Act. Each Initial
Purchaser severally represents and agrees that it has not entered and will not
enter into any contractual arrangements with respect to the distribution of the
Securities, except with its affiliates or with the prior written consent of the
Company.
SECTION 7. Indemnification.
(a) Indemnification of Initial Purchasers. The Company agrees to
indemnify and hold harmless each Initial Purchaser and each person, if any, who
controls any Initial Purchaser within the meaning of Section 15 of the 1933 Act
or Section 20 of the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement of a material fact contained in the Final Offering
Memorandum (or any amendment or supplement thereto), or the omission or
alleged omission therefrom of a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they
were made, not misleading;
-19-
<PAGE>
(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission; provided that (subject to Section
7(d) below) any such settlement is effected with the written consent of the
Company; and
(iii) against any and all expense whatsoever, as incurred (including
the fees and disbursements of counsel chosen by Merrill Lynch), reasonably
incurred in investigating, preparing or defending against any litigation,
or any investigation or proceeding by any governmental agency or body,
commenced or threatened, or any claim whatsoever based upon any such untrue
statement or omission, or any such alleged untrue statement or omission, to
the extent that any such expense is not paid under (i) or (ii) above;
provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by any
Initial Purchaser through the Representative expressly for use in the Offering
Memorandum (or any amendment thereto), which information is described in Section
1(a)(ii) hereof.
(b) Indemnification of Company, Directors and Officers. Each Initial
Purchaser severally agrees to indemnify and hold harmless the Company, its
directors, each of its officers who would be required to sign the Offering
Memorandum if it were a registration statement on Form S-1, and each person, if
any, who controls the Company within the meaning of Section 15 of the 1933 Act
or Section 20 of the 1934 Act against any and all loss, liability, claim, damage
and expense described in the indemnity contained in subsection (a) of this
Section, as incurred, but only with respect to untrue statements or omissions,
or alleged untrue statements or omissions, made in the Offering Memorandum in
reliance upon and in conformity with written information furnished to the
Company by such Initial Purchaser through the Representatives expressly for use
in the Offering Memorandum.
(c) Actions against Parties; Notification. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve such
indemnifying party from any liability hereunder to the extent it is not
materially prejudiced as a result thereof and in any event shall not relieve it
from any liability which it may have otherwise than on account of this indemnity
agreement. In the case of parties indemnified pursuant to Section 7(a) above,
counsel to the indemnified parties shall be selected by Merrill Lynch, and, in
the case of parties indemnified pursuant to Section 7(b) above, counsel to the
indemnified parties shall be selected by the Company. An indemnifying party may
participate at its own expense in the defense of any such action; provided,
however, that counsel to the indemnifying party shall not (except with the
consent of
-20-
<PAGE>
the indemnified party) also be counsel to the indemnified party. In no event
shall the indemnifying parties be liable for fees and expenses of more than one
counsel (in addition to any local counsel) separate from their own counsel for
all indemnified parties in connection with any one action or separate but
similar or related actions in the same jurisdiction arising out of the same
general allegations or circumstances. No indemnifying party shall, without the
prior written consent of the indemnified parties, settle or compromise or
consent to the entry of any judgment with respect to any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever in respect of which indemnification or
contribution could be sought under this Section 7 or Section 8 hereof (whether
or not the indemnified parties are actual or potential parties thereto), unless
such settlement, compromise or consent (i) includes an unconditional release of
each indemnified party from all liability arising out of such litigation,
investigation, proceeding or claim and (ii) does not include a statement as to
or an admission of fault, culpability or a failure to act by or on behalf of any
indemnified party.
(d) Settlement without Consent if Failure to Reimburse. If at any time
an indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel, such indemnifying party
agrees that it shall be liable for any settlement of the nature contemplated by
Section 7(a)(ii) effected without its written consent if (i) such settlement is
entered into more than 45 days after receipt by such indemnifying party of the
aforesaid request, (ii) such indemnifying party shall have received notice of
the terms of such settlement at least 30 days prior to such settlement being
entered into and (iii) such indemnifying party shall not have reimbursed such
indemnified party in accordance with such request prior to the date of such
settlement.
SECTION 8. Contribution. If the indemnification provided for in Section
7 hereof is for any reason unavailable to or insufficient to hold harmless an
indemnified party in respect of any losses, liabilities, claims, damages or
expenses referred to therein, then each indemnifying party shall contribute to
the aggregate amount of such losses, liabilities, claims, damages and expenses
incurred by such indemnified party, as incurred, (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company on the one
hand and the Initial Purchasers on the other hand from the offering of the
Securities pursuant to this Agreement or (ii) if the allocation provided by
clause (i) is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company on the one hand and of the
Initial Purchasers on the other hand in connection with the statements or
omissions which resulted in such losses, liabilities, claims, damages or
expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Company on the one hand and the
Initial Purchasers on the other hand in connection with the offering of the
Securities pursuant to this Agreement shall be deemed to be in the same
respective proportions as the total net proceeds from the offering of the
Securities pursuant to this Agreement (before deducting expenses) received by
the Company and the total underwriting discount received by the Initial
Purchasers, bear to the aggregate initial offering price of the Securities.
-21-
<PAGE>
The relative fault of the Company on the one hand and the Initial
Purchasers on the other hand shall be determined by reference to, among other
things, whether any such untrue or alleged untrue statement of a material fact
or omission or alleged omission to state a material fact relates to information
supplied by the Company or by the Initial Purchasers and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission.
The Company and the Initial Purchasers agree that it would not be just and
equitable if contribution pursuant to this Section 8 were determined by pro rata
allocation (even if the Initial Purchasers were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 8. The aggregate
amount of losses, liabilities, claims, damages and expenses incurred by an
indemnified party and referred to above in this Section 8 shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue or alleged untrue
statement or omission or alleged omission.
Notwithstanding the provisions of this Section 8, no Initial Purchaser
shall be required to contribute any amount in excess of the amount by which the
total price at which the Securities underwritten by it and distributed pursuant
to this Agreement were offered to the Subsequent Purchasers exceeds the amount
of any damages which such Initial Purchaser has otherwise been required to pay
by reason of such untrue or alleged untrue statement or omission or alleged
omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11 (f) of the 1933 Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 8, each person, if any, who controls an
Initial Purchaser within the meaning of Section 15 of the 1933 Act or Section 20
of the 1934 Act shall have the same rights to contribution as such Initial
Purchaser, and each director of the Company, each officer of the Company who
would be required to sign the Offering Memorandum if it were a registration
statement on Form S-1, and each person, if any, who controls the Company within
the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall
have the same rights to contribution as the Company. The Initial Purchasers'
respective obligations to contribute pursuant to this Section 8 are several in
proportion to the principal amount of Securities set forth opposite their
respective names in Schedule A hereto and not joint.
SECTION 9. Representations, Warranties and Agreements to Survive Delivery.
All representations, warranties and agreements contained in this Agreement or in
certificates of officers of the Company submitted pursuant hereto, shall remain
operative and in full force and effect, regardless of any investigation made by
or on behalf of any Initial Purchaser or controlling person, or by or on behalf
of the Company, and shall survive delivery of the Securities to the Initial
Purchasers.
-22-
<PAGE>
SECTION 10. Termination of Agreement.
(a) Termination; General. The Representatives may terminate this
Agreement, by notice to the Company, at any time at or prior to the Closing Time
(i) if there has been, since the time of execution of this Agreement or since
the respective dates as of which information is given in the Offering
Memorandum, any material adverse change in the condition, financial or
otherwise, or in the earnings, business affairs or business prospects of the
Company and its subsidiaries considered as one enterprise, whether or not
arising in the ordinary course of business, or (ii) if there has occurred any
material adverse change in the financial markets in the United States or the
international financial markets, any outbreak of hostilities or escalation
thereof or other calamity or crisis or any change or development involving a
prospective change in national or international political, financial or economic
conditions, in each case the effect of which is such as to make it, in the
judgment of the Representatives, impracticable to market the Securities or to
enforce contracts for the sale of the Securities, or (iii) if trading in any
securities of the Company has been suspended or limited by the Commission, or if
trading generally on the American Stock Exchange or the New York Stock Exchange
or in the Nasdaq National Market has been suspended or limited, or minimum or
maximum prices for trading have been fixed, or maximum ranges for prices have
been required, by any of said exchanges or by such system or by order of the
Commission, the National Association of Securities Dealers, Inc. or any other
governmental authority, or (iv) if a banking moratorium has been declared by
either Federal or New York authorities.
(b) Liabilities. If this Agreement is terminated pursuant to this Section,
such termination shall be without liability of any party to any other party
except as provided in Section 4 hereof, and provided further that Sections 1, 7
and 8 shall survive such termination and remain in full force and effect.
SECTION 11. Default by One or More of the Initial Purchasers. If one or
more of the Initial Purchasers shall fail at the Closing Time to purchase the
Securities which it or they are obligated to purchase under this Agreement (the
"Defaulted Securities"), the Representatives shall have the right, but not the
obligation, within 24 hours thereafter, to make arrangements, for one or more of
the non-defaulting Initial Purchasers, or any other Initial Purchasers, to
purchase all, but not less than all, of the Defaulted Securities in such amounts
as may be agreed upon and upon the terms herein set forth; if, however, the
Representatives shall not have completed such arrangements within such 24-hour
period, then this Agreement shall terminate without liability on the part of any
non-defaulting Initial Purchaser.
No action pursuant to this Section shall relieve any defaulting Initial
Purchaser from liability in respect of its default.
In the event of any such default which does not result in a termination of
this Agreement, either the Representatives or the Company shall have the right
to postpone the Closing Time for a period not exceeding seven days in order to
effect any required changes in the Offering Memorandum or in any other documents
or arrangement.
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<PAGE>
SECTION 12. Notices. All notices and other communications hereunder
shall be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the Initial
Purchasers shall be directed to the Representatives at North Tower, World
Financial Center, New York, New York 10281-11201, attention of Marcey Becker,
with a courtesy copy to Malcolm I. Ross, Baker & McKenzie, 805 Third Avenue, New
York, New York 10022; notices to the Company shall be directed to it at 6933
South Revere Parkway, Englewood, Colorado 80112, attention of Scott Chandler,
with a courtesy copy to Richard R. Plumridge, Brobeck Phleger & Harrison LLP,
370 Interlocken Boulevard, Suite 500, Denver, Colorado 80021.
SECTION 13. Parties. This Agreement shall inure to the benefit of and
be binding upon the Initial Purchasers and the Company and their respective
successors. Nothing expressed or mentioned in this Agreement is intended or
shall be construed to give any person, firm or corporation, other than the
Initial Purchasers and the Company and their respective successors and the
controlling persons and officers and directors referred to in Sections 7 and 8
and their heirs and legal representatives, any legal or equitable right, remedy
or claim under or in respect of this Agreement or any provision herein
contained. This Agreement and all conditions and provisions hereof are intended
to be for the sole and exclusive benefit of the Initial Purchasers and the
Company and their respective successors, and said controlling persons and
officers and directors and their heirs and legal representatives, and for the
benefit of no other person, firm or corporation. No purchaser of Securities
from any Initial Purchaser shall be deemed to be a successor by reason merely of
such purchase.
SECTION 14. Governing Law and Time. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. SPECIFIED TIMES
OF DAY REFER TO NEW YORK CITY TIME.
SECTION 15. Effect of Headings. The Article and Section headings herein and
the Table of Contents are for convenience only and shall not affect the
construction hereof.
[signature page follows]
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<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to the Company a counterpart hereof, whereupon this
instrument, along with all counterparts, will become a binding agreement between
the Initial Purchasers and the Company in accordance with its terms.
Very truly yours,
RHYTHMS NETCONNECTIONS, INC.
By:
---------------------------------
Scott Chandler
Chief Financial Officer
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
SALOMON SMITH BARNEY INC.
CHASE SECURITIES INC.
CREDIT SUISSE FIRST BOSTON CORPORATION
By: MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By
--------------------------------
Authorized Signatory
For themselves and as Representatives of the other Initial Purchasers named in
Schedule A hereto.
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<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Name of Initial Purchaser Principal Amount
------------------------- --------------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith Incorporated............. $105,000,000
Salomon Smith Barney Inc....................................... 105,000,000
Chase Securities Inc........................................... 52,500,000
Credit Suisse First Boston Corporation......................... 37,500,000
Total.......................................................... $300,000,000
====================
</TABLE>
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<PAGE>
SCHEDULE B
RHYTHMS NETCONNECTIONS, INC.
14% Senior Notes due 2010
1. The initial public offering price of the Securities shall be 100.0% of
the principal amount of the Notes.
2. The purchase price to be paid by the Initial Purchasers for the
Securities shall be 97.25% of the principal amount of the Notes.
3. The interest rate on the Notes shall be 14% per annum commencing
February 23, 2000.
4. The further terms and conditions of the Securities are as set forth in
the Offering Memorandum.
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<PAGE>
Exhibit A-1
FORM OF OPINION OF COMPANY'S LEGAL COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(a)(i)
[Form of Brobeck Phleger opinion follows]
A-1
<PAGE>
Exhibit A-2
FORM OF OPINION OF COMPANY'S LEGAL COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(a)(ii)
[Form of Hale and Dorr opinion follows]
A-2
<PAGE>
Exhibit A-3
FORM OF OPINION OF COMPANY'S LEGAL COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(a)(iii)
[Form of Blumenfeld & Cohen opinion follows]
A-3
<PAGE>
Exhibit A-4
FORM OF OPINION OF COMPANY'S LEGAL COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(a)(iv)
[Form of LeBoeuf Lamb opinion follows]
A-4
<PAGE>
Exhibit A-5
FORM OF OPINION OF THE COMPANY'S LEGAL COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(a)(v)
[Form of General Counsel opinion follows]
A-5
<PAGE>
Exhibit A-6
FORM OF OPINION OF INITIAL PURCHASERS' LEGAL COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(b)
[Form of Baker & McKenzie opinion follows]
A-6
<PAGE>
Exhibit 10.36
RHYTHMS NETCONNECTIONS INC.
(a Delaware corporation)
2,500,000 Shares
6 3/4% Cumulative Convertible Preferred Stock
PURCHASE AGREEMENT
Dated: February 28, 2000
<PAGE>
2,500,000 Shares
RHYTHMS NETCONNECTIONS INC.
(a Delaware corporation)
6 3/4% Cumulative Convertible Preferred Stock
PURCHASE AGREEMENT
------------------
February 28, 2000
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Salomon Smith Barney Inc.
Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Ladies and Gentlemen:
Rhythms NetConnections Inc., a Delaware corporation (the "Company"),
confirms its agreement with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch") and Salomon Smith Barney Inc.
(collectively, the "Initial Purchasers", which term shall also include any
initial purchaser substituted as hereinafter provided in Section 11 hereof),
with respect to the issue and sale by the Company and the purchase by the
Initial Purchasers, acting severally and not jointly, of the respective number
of shares of 6 3/4% Cumulative Convertible Preferred Stock (liquidation
preference equal to $100.00 per share) of the Company (the "Preferred Stock")
set forth in said Schedule A, and with respect to the grant by the Company to
the Initial Purchasers, acting severally and not jointly, of the option
described in Section 2(b) hereof to purchase all or any part of 500,000
additional shares of Preferred Stock to cover over-allotments, if any. The
aforesaid 2,500,000 shares of Preferred Stock (the "Firm Shares") to be
purchased by the Initial Purchasers and all or any part of the 500,000 shares of
Preferred Stock subject to the option describe in Section 2(b) hereof (the
"Option Shares") are hereinafter called, collectively, the "Shares." The Shares
will be issued in book-entry form and will be issued to Cede & Co. as nominee of
The Depository Trust Company ("DTC") pursuant to the Letter of Representations,
to be dated as of the Closing Time (as defined herein) (the "DTC Agreement"),
among the Company and DTC.
The holders of the Shares (including the Initial Purchasers and Subsequent
Purchasers (as defined)) will be entitled to the benefits of a registration
rights agreement, to be dated as of
<PAGE>
March 3, 2000 (the "Registration Rights Agreement"), between the Company and the
Initial Purchasers. Pursuant to the Registration Rights Agreement, the Company
will agree to file with the Securities and Exchange Commission under the
circumstances set forth therein a shelf registration statement pursuant to Rule
415 under the Securities Act of 1933, as amended (the "1933 Act") relating to
the resale of the Shares and, upon conversion of the Shares, the Common Stock,
and to use its commercially reasonable best efforts to cause such shelf
registration statement to be declared effective.
This Agreement, the Registration Rights Agreement and the Company's
Certificate of Designations, Preferences and Relative, Participating, Optional
and Other Special Rights of Preferred Stock are hereinafter referred to
collectively as the "Operative Documents."
The Company understands that the Initial Purchasers propose to make an
offering of the Shares on the terms and in the manner set forth herein and in
the Offering Memorandum (as defined) and agrees that the Initial Purchasers may
resell, subject to the conditions set forth herein, all or a portion of the
Shares to purchasers ("Subsequent Purchasers") at any time after the date of
this Agreement. The Shares are to be offered and sold through the Initial
Purchasers without being registered under the 1933 Act in reliance upon the
exemption afforded by Rule 144A ("Rule 144A") of the rules and regulations of
the Securities and Exchange Commission (the "Commission") under the 1933 Act
(the "1933 Act Regulations"). Pursuant to the terms of the Shares, investors
that acquire Shares may only resell or otherwise transfer such Shares if such
Shares are hereafter registered under the 1933 Act or if an exemption from the
registration requirements of the 1933 Act is available (including the exemption
afforded by Rule 144A).
The Company has prepared and delivered to each Initial Purchaser copies of
a preliminary offering memorandum dated February 25, 2000 (the "Preliminary
Offering Memorandum") and has prepared and will deliver to each Initial
Purchaser, on the date hereof or the next succeeding day, copies of a final
offering memorandum dated February 28, 2000 (the "Final Offering Memorandum"),
each for use by such Initial Purchaser in connection with its solicitation of
purchases of, or offering of, the Shares. "Offering Memorandum" means, with
respect to any date or time referred to in this Agreement, the most recent
offering memorandum (whether the Preliminary Offering Memorandum or the Final
Offering Memorandum, or any amendment or supplement to either such document),
which has been prepared and delivered by the Company to the Initial Purchasers
in connection with their solicitation of purchases of, or offering of, the
Shares.
SECTION 1. Representations and Warranties.
(a) Representations and Warranties by the Company . The Company represents
and warrants to each Initial Purchaser as of the date hereof, and will represent
as of the Closing Time referred to in Section 2(c) hereof and as of each Date of
Delivery (if any) referred to in Section 2(b) hereof, by means of the
certificate described in Section 5(c) or 5(i)(i) hereof, and agrees with each
Initial Purchaser as follows:
(i) Similar Offerings. The Company has not, directly or indirectly,
solicited any offer to buy or offered to sell, and will not, directly or
indirectly, solicit any offer to buy or offer to sell, in the United States
or to any United States citizen or resident, any
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<PAGE>
security which is or would be integrated with the sale of the Shares in a
manner that would require the Shares to be registered under the 1933 Act.
(ii) Offering Memorandum. The Offering Memorandum does not, and at the
Closing Time will not, include an untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided that this representation, warranty and agreement shall
not apply to such statements in or omissions from the Offering Memorandum
made in reliance upon and in conformity with information furnished to the
Company in writing by any Initial Purchaser expressly for use in the
Offering Memorandum. It is understood that the statements set forth in the
Offering Memorandum under the heading "Plan of Distribution" and the
identity of counsel to the Initial Purchasers under the heading "Legal
Matters" constitute the only information furnished in writing by or on
behalf of the Initial Purchasers expressly for use in the Offering
Memorandum.
(iii) Independent Accountants. The accountants who certified the
financial statements included in the Offering Memorandum are independent
certified public accountants with respect to the Company and its
subsidiaries within the meaning of Regulation S-X under the 1933 Act.
(iv) Financial Statements. The financial statements, together with the
related schedules and notes, included in the Offering Memorandum present
fairly the consolidated financial position of the Company and its
subsidiaries at the dates indicated and the statement of operations,
stockholders' equity and cash flows of the Company and its consolidated
subsidiaries for the periods specified; said financial statements have been
prepared in conformity with generally accepted accounting principles
("GAAP") applied on a consistent basis throughout the periods involved. The
selected financial data included in the Offering Memorandum present fairly
the information shown therein and have been compiled on a basis consistent
with that of the audited financial statements included in the Offering
Memorandum. The pro forma and pro forma as adjusted columns of the selected
financial data included in the Offering Memorandum and the related notes
thereto present fairly the information shown therein, have been prepared in
accordance with the Commission's rules and guidelines with respect to pro
forma financial information and have been properly compiled on the bases
described therein, and the assumptions used in the preparation thereof are
reasonable and the adjustments used therein are appropriate to give effect
to the transactions and circumstances referred to therein.
(v) No Material Adverse Change in Business. Since the respective
dates as of which information is given in the Offering Memorandum, except as
otherwise stated therein, (A) there has been no material adverse change in
the condition, financial or otherwise, or in the earnings, business affairs
or business prospects of the Company and its subsidiaries considered as one
enterprise (a "Material Adverse Effect"), whether or not arising in the
ordinary course of business, (B) there have been no transactions entered
into by the Company or any of its subsidiaries, other than those in the
ordinary course of business, which are material with respect to the Company
and its subsidiaries considered
3
<PAGE>
as one enterprise, and (C) there has been no dividend or distribution of any
kind declared, paid or made by the Company on any class of its capital
stock.
(vi) Good Standing of the Company. The Company has been duly
organized and is validly existing as a corporation in good standing under
the laws of the State of Delaware and has corporate power and authority to
own, lease and operate its properties and to conduct its business as
described in the Offering Memorandum and to enter into and perform its
obligations under this Agreement; and the Company is duly qualified as a
foreign corporation to transact business and is in good standing in each
other jurisdiction in which such qualification is required, whether by
reason of the ownership or leasing of property or the conduct of business,
except where the failure so to qualify or to be in good standing would not
result in a Material Adverse Effect.
(vii) Good Standing of Subsidiaries. Each of the Designated
Subsidiaries has been duly organized and is validly existing as a
corporation or a public benefit corporation, as the case may be, in good
standing under the laws of the jurisdiction of its incorporation, has
corporate power and authority to own, lease and operate its properties and
to conduct its business as described in the Offering Memorandum and is duly
qualified as a foreign corporation to transact business and is in good
standing, in each jurisdiction in which such qualification is required,
whether by reason of the ownership or leasing of property or the conduct of
business, except where the failure so to qualify or to be in good standing
would not result in a Material Adverse Effect; except as otherwise disclosed
in the Offering Memorandum, all of the issued and outstanding capital stock
of each Designated Subsidiary has been duly authorized and validly issued,
is fully paid and non-assessable and is directly or indirectly owned by the
Company, free and clear of any security interest, mortgage, pledge, lien,
encumbrance, claim or equity; none of the outstanding shares of capital
stock of any Designated Subsidiary was issued in violation of any preemptive
or similar rights arising by operation of law, or under the charter or by-
laws of such Designated Subsidiary or under any agreement to which the
Company or such Designated Subsidiary is a party. The Company has no
subsidiaries other than Rhythms Links Inc., Rhythms Links Inc.--Virginia,
Rhythms Canada and Rhythms Europe (collectively, the "Designated
Subsidiaries").
(viii) Capitalization. The authorized, issued and outstanding capital
stock of the Company is as set forth in the Offering Memorandum in the
column entitled "Pro Forma" under the caption "Capitalization" (except for
subsequent issuances, if any, pursuant to this Agreement, pursuant to
employee benefit or stock option plans referred to in the Offering
Memorandum or pursuant to the exercise of convertible securities or options
referred to in the Offering Memorandum).
(ix) Authorization of Agreement. This Agreement has been duly
authorized, executed and delivered by the Company.
(x) Authorization and Description of Shares. The Shares to be
purchased by the Initial Purchasers from the Company have been duly and
validly authorized for issuance and sale to the Initial Purchasers pursuant
to this Agreement, and, when issued and delivered by the Company pursuant to
this Agreement, against payment of the consideration set forth herein, will
be validly issued, fully paid and non-assessable; the
4
<PAGE>
shares of Common Stock issuable upon conversion of the Shares have been duly
and validly authorized and reserved for issuance and, when issued and
delivered in accordance with the provisions of the Shares, will be duly and
validly issued, fully paid and non-assessable; the Shares and Common Stock
conform in all material respects to all statements relating thereto
contained in the Offering Memorandum and such descriptions conform to the
rights set forth in the instruments defining the same; no holder of the
Shares will be subject to personal liability by reason of being such a
holder; and the issuances of the Shares and the Common Stock issuable upon
conversion of the Shares are not subject to the preemptive or other similar
rights of any securityholder of the Company.
(xi) Authorization of the Registration Rights Agreement. The
Registration Rights Agreement has been duly authorized by the Company and,
at the Closing Time, will have been duly executed and delivered by the
Company and will constitute the valid and binding agreement of the Company,
enforceable against the Company in accordance with its terms, except as the
enforcement thereof may be limited by bankruptcy, insolvency (including,
without limitation, all laws relating to fraudulent transfers),
reorganization, moratorium or other similar laws relating to or affecting
enforcement of creditors' rights generally, or by general principles of
equity (regardless of whether enforcement is considered in a proceeding in
equity or at law). The Registration Rights Agreement will conform in all
material respects to the statements relating thereto contained in the
Offering Memorandum and will be in substantially the respective form
previously delivered to the Initial Purchasers.
(xii) Absence of Defaults and Conflicts. Neither the Company nor any
of its subsidiaries is in violation of its charter or by-laws or in default
in the performance or observance of any obligation, agreement, covenant or
condition contained in any contract, indenture, mortgage, deed of trust,
loan or credit agreement, note, lease or other agreement or instrument to
which the Company or any of its subsidiaries is a party or by which any of
them may be bound, or to which any of the property or assets of the Company
or any of its subsidiaries is subject (collectively, "Agreements and
Instruments"), except for such defaults that would not result in a Material
Adverse Effect, and the execution, delivery and performance of this
Agreement, the Registration Rights Agreement and any other agreement or
instrument entered into or issued or to be entered into or issued by the
Company in connection with the transactions contemplated hereby or thereby
or in the Offering Memorandum and the consummation of the transactions
contemplated herein and in the Offering Memorandum (including the issuance
and sale of the Shares and the use of the proceeds from the sale of the
Shares as described in the Offering Memorandum under the caption "Use of
Proceeds") and compliance by the Company with its obligations hereunder have
been duly authorized by all necessary corporate action and do not and will
not, whether with or without the giving of notice or passage of time or
both, conflict with or constitute a breach of, default or a Repayment Event
(as defined below) under, or result in the creation or imposition of any
lien, charge or encumbrance upon any property or assets of the Company or
any of its subsidiaries pursuant to, the Agreements and Instruments, except
for such conflicts, breaches or defaults or liens, charges or encumbrances
that, singly or in the aggregate, would not result in a Material Adverse
Effect, nor will such action result in any violation of the
5
<PAGE>
provisions of the charter or by-laws of the Company or any of its
subsidiaries or any applicable law, statute, rule, regulation, judgment,
order, writ or decree of any government, government instrumentality or
court, domestic or foreign, having jurisdiction over the Company or any of
its subsidiaries or any of their assets or properties. As used herein, a
"Repayment Event" means any event or condition which gives the holder of any
note, debenture, other evidence of indebtedness or preferred stock (or any
person acting on such holder's behalf) the right to require the repurchase,
redemption or repayment of all or a portion of such indebtedness or
preferred stock by the Company or any of its subsidiaries.
(xiii) Absence of Labor Dispute. No labor dispute with the employees of
the Company or any of its subsidiaries exists or, to the knowledge of the
Company, is imminent, and the Company is not aware of any existing or
imminent labor disturbance by the employees of any of its or any of its
subsidiaries' principal suppliers, manufacturers, customers or contractors,
which, in either case, may reasonably be expected to result in a Material
Adverse Effect.
(xiv) Absence of Proceedings. Except as disclosed in the Offering
Memorandum, there is no action, suit, proceeding, inquiry or investigation
before or by any court or governmental agency or body, domestic or foreign,
now pending, or, to the knowledge of the Company, threatened, against or
affecting the Company or any subsidiary thereof which might reasonably be
expected to result in a Material Adverse Effect, or which might reasonably
be expected to materially and adversely affect the properties or assets of
the Company or any of its subsidiaries or the consummation of this Agreement
or the performance by the Company of its obligations hereunder. The
aggregate of all pending legal or governmental proceedings to which the
Company or any subsidiary thereof is a party or of which any of their
respective property or assets is the subject which are not described in the
Offering Memorandum, including ordinary routine litigation incidental to the
business, could not reasonably be expected to result in a Material Adverse
Effect.
(xv) Possession of Intellectual Property. Except as disclosed in the
Offering Memorandum, (A) the Company and its subsidiaries own or possess, or
can acquire on reasonable terms, adequate patents, patent rights, licenses,
inventions, copyrights, know-how (including trade secrets and other
unpatented and/or unpatentable proprietary or confidential information,
systems or procedures), trademarks, service marks, trade names or other
intellectual property (collectively, "Intellectual Property") necessary to
carry on the business now operated by them, except that the Company and its
subsidiaries may fail to so own, possess or have the ability to acquire on
reasonable terms any Intellectual Property if such failure would not result,
singly or in the aggregate, in a Material Adverse Effect, and (B) neither
the Company nor any of its subsidiaries has received any notice or is
otherwise aware of any infringement of or conflict with asserted rights of
others with respect to any Intellectual Property or of any facts or
circumstances which would render any Intellectual Property invalid or
inadequate to protect the interest of the Company or any of its subsidiaries
therein, and which infringement or conflict (if the subject of any
unfavorable decision, ruling or finding) or invalidity or inadequacy, singly
or in the aggregate, would result in a Material Adverse Effect.
6
<PAGE>
(xvi) Absence of Further Requirements. No filing with, or
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or agency is
necessary or required for the performance by the Company of its obligations
hereunder, in connection with the offering, issuance or sale of the Shares
hereunder or the consummation of the transactions contemplated by this
Agreement, except as may be required under the 1933 Act or state securities
or "blue sky" laws in connection with the registration statement to be filed
in accordance with the terms of the Registration Rights Agreement.
(xvii) Possession of Licenses and Permits. Except as disclosed in the
Offering Memorandum, the Company and its subsidiaries possess such permits,
licenses, approvals, consents and other authorizations issued by the
appropriate federal, state, local or foreign regulatory agencies or bodies
necessary to conduct the business now operated by them (collectively,
"Governmental Licenses"); the Company and its subsidiaries are in compliance
with the terms and conditions of all such Governmental Licenses, except
where the failure so to comply would not, singly or in the aggregate, have a
Material Adverse Effect; all of the Governmental Licenses are valid and in
full force and effect, except where the invalidity of such Governmental
Licenses or the failure of such Governmental Licenses to be in full force
and effect would not have a Material Adverse Effect; and neither the Company
nor any of its subsidiaries has received any notice of proceedings relating
to the revocation or modification of any such Governmental Licenses which,
singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would result in a Material Adverse Effect. The Company
has not been informed of any fact, event or circumstance that is reasonably
likely to impair the Company's (or its subsidiaries') ability to obtain any
Governmental Licenses necessary or advisable in order to effectuate the
Company's future plans and strategies described in the Offering Memorandum
and no event exists that permits, or after notice or lapse of time or both,
would permit, revocation or termination of any Governmental License or
result in any impairment of rights of the Company or any of its subsidiaries
under any such Governmental Licenses. Without limiting the generality of
this paragraph (xvii):
(A) the Company and each of its subsidiaries hold all
telecommunications regulatory licenses, permits, authorizations,
consents and approvals (the "Telecommunications Licenses") required
from the Federal Communications Commission (the "FCC") for the Company
and its subsidiaries to conduct their business on and as of the date
hereof in the manner described in the Offering Memorandum, except as
would not have, individually or in the aggregate, a Material Adverse
Effect; the Telecommunications Licenses have been duly and validly
issued and are in full force and effect, except where the failure to be
in full force and effect would not have, individually or in the
aggregate, a Material Adverse Effect; no proceedings to revoke or
restrict the Telecommunications Licenses are pending or, to the best of
the Company's knowledge, threatened; neither the Company nor its
subsidiaries are in violation of any of the terms and conditions of any
of the Telecommunications Licenses, are in violation of the
Communications Act of 1934, as amended (the "Communications Act"), or
are in violation of any FCC rules and regulations, or state regulatory
laws, rules or regulations, except as would not have, individually
7
<PAGE>
or in the aggregate, a Material Adverse Effect; and the Company and its
subsidiaries have in effect with the FCC all international and domestic
service tariffs necessary to conduct their business on and as of the
date hereof in the manner described in the Offering Memorandum except
as would not have, individually or in the aggregate, a Material Adverse
Effect;
(B) the Company and its subsidiaries have obtained all state
and municipal Telecommunications Licenses and filed all tariffs
required for the provision of telecommunications services in any state
to conduct their business on and as of the date hereof in the manner
described in the Offering Memorandum, except where the failure to do so
would not have, individually or in the aggregate, a Material Adverse
Effect;
(C) there is no outstanding adverse judgment, injunction,
decree or order that has been issued by the FCC or any state utility
commission or similar state agency ("PUC") or municipality against the
Company or its subsidiaries or any action, proceeding or investigation
pending before the FCC or any state PUC or municipality, or, to the
Company's knowledge, threatened by the FCC or any state PUC or
municipality against the Company or its subsidiaries which, if the
subject of any unfavorable decision, ruling or finding, would have a
Material Adverse Effect on the Company or its subsidiaries;
(D) no license, permit, consent, approval, order or
authorization of, or filing with, the FCC or with any state PUC or
municipal authority on the part of the Company or its subsidiaries is
required in connection with the issuance or sale of the Shares;
(E) neither the issuance and sale of the Shares nor the
performance by the Company or its subsidiaries of their obligations
under this Agreement or the Registration Rights Agreements will result
in a violation in any material respect of: (1) the Communications Act
or the applicable rules or regulations, or any order, writ, judgment,
injunction, decree or award of the FCC binding on the Company or its
subsidiaries; (2) any state telecommunications laws or any applicable
state PUC rules or regulations, or any order, writ, judgment,
injunction, decree or award of any state PUC binding on the Company or
its subsidiaries; (3) any municipal rules or regulations applicable to
the Company or its subsidiaries; or (4) the Governmental Licenses; and
(F) the Governmental Licenses do not have an expiration date or
are renewable by their terms or in the ordinary course of business
without the need to comply with any qualification procedures not
generally applicable to the renewal of Governmental Licenses or to pay
any amounts other than routine filing fees.
(xviii) Title to Property. The Company and its subsidiaries have good
and marketable title to all real property owned by the Company and its
subsidiaries and good title to all other properties owned by them, in each
case, free and clear of all mortgages, pledges, liens, security interests,
claims, restrictions or encumbrances of any kind except
8
<PAGE>
such as (a) are described in the Offering Memorandum or (b) do not, singly
or in the aggregate, materially affect the value of such property and do not
interfere with the use made and proposed to be made of such property by the
Company or any of its subsidiaries; and all of the leases and subleases
material to the business of the Company and its subsidiaries, considered as
one enterprise, and under which the Company or any of its subsidiaries holds
properties described in the Offering Memorandum, are in full force and
effect, and neither the Company nor any of its subsidiaries has any notice
of any material claim of any sort that has been asserted by anyone adverse
to the rights of the Company or any of its subsidiaries under any of the
leases or subleases mentioned above, or affecting or questioning the rights
of the Company or any subsidiary thereof to the continued possession of the
leased or subleased premises under any such lease or sublease.
(xix) Tax Returns. The Company and its subsidiaries have filed all
federal, state, local and foreign tax returns that are required to be filed
or have duly requested extensions thereof and have paid all taxes required
to be paid by any of them and any related assessments, fines or penalties,
except for any such tax, assessment, fine or penalty that is being contested
in good faith and by appropriate proceedings, and adequate charges, accruals
and reserves have been provided for in the financial statements referred to
in Section l(a)(iv) above in respect of all federal, state, local and
foreign taxes for all periods as to which the tax liability of the Company
or any of its subsidiaries has not been finally determined or remains open
to examination by applicable taxing authorities, except for such failures to
file, request extensions, make payments and provide for adequate charges,
accruals and reserves as would not, singly or in the aggregate, result in a
Material Adverse Effect.
(xx) Environmental Laws. Except as described in the Offering
Memorandum and except such matters as would not, singly or in the aggregate,
result in a Material Adverse Effect, (A) neither the Company nor any of its
subsidiaries is in violation of any federal, state, local or foreign
statute, law, rule, regulation, ordinance, code, policy or rule of common
law or any judicial or administrative interpretation thereof, including any
judicial or administrative order, consent, decree or judgment, relating to
pollution or protection of human health, the environment (including, without
limitation, ambient air, surface water, groundwater, land surface or
subsurface strata) or wildlife, including, without limitation, laws and
regulations relating to the release or threatened release of chemicals,
pollutants, contaminants, wastes, toxic substances, hazardous substances,
petroleum or petroleum products (collectively, "Hazardous Materials") or to
the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of Hazardous Materials (collectively,
"Environmental Laws"), (B) the Company and its subsidiaries have all
permits, authorizations and approvals required under any applicable
Environmental Laws and are each in compliance with their requirements, (C)
there are no pending or threatened administrative, regulatory or judicial
actions, suits, demands, demand letters, claims, liens, notices of
noncompliance or violation, investigation or proceedings relating to any
Environmental Law against the Company or any of its subsidiaries and (D)
there are no events or circumstances that might reasonably be expected to
form the basis of an order for clean-up or remediation, or an action, suit
or proceeding by any private party or governmental body or agency, against
or affecting the
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Company or any of its subsidiaries relating to Hazardous Materials or
Environmental Laws.
(xxi) Investment Company Act. The Company is not, and upon the
issuance and sale of the Shares as herein contemplated and the application
of the net proceeds therefrom as described in the Offering Memorandum will
not be, an "investment company" or an entity "controlled" by an "investment
company" as such terms are defined in the Investment Company Act of 1940, as
amended (the "1940 Act").
(xxii) Rule 144A Eligibility. The Shares are eligible for resale
pursuant to Rule 144A and will not be, at the Closing Time, of the same
class as securities listed on a national securities exchange registered
under Section 6 of the Securities Exchange Act of 1934, as amended (the
"1934 Act"), or quoted in a U.S. automated interdealer quotation system.
(xxiii) No General Solicitation. None of the Company, its affiliates,
as such term is defined in Rule 501(b) under the 1933 Act ("Affiliates"), or
any person acting on its or any of their behalf (other than the Initial
Purchasers, as to whom the Company makes no representation) has engaged or
will engage, in connection with the offering of the Shares, in any form of
general solicitation or general advertising within the meaning of Rule
502(c) under the 1933 Act.
(xxiv) No Registration Required. Subject to compliance by the Initial
Purchasers with the representations and warranties set forth in Section 2
and the procedures set forth in Section 6 hereof, it is not necessary in
connection with the offer, sale and delivery of the Shares to the Initial
Purchasers and to each Subsequent Purchaser in the manner contemplated by
this Agreement and the Offering Memorandum to register the Shares under the
1933 Act.
(xxv) Disqualified Stock. The Company's 8.25% Series E Convertible
Preferred Stock due 2015 ("Series E Preferred Stock") is not "Disqualified
Stock" within the meaning of the Indentures dated as of May 5, 1998 and
April 23, 1999 between the Company and State Street Bank and Trust Company
of California, N.A.
(xxvi) Insurance. The Company and each of its subsidiaries maintains
insurance covering its properties, operations, personnel and business. Such
insurance insures against such losses and risks as are adequate in
accordance with customary industry practice to protect the Company, each of
its subsidiaries and their businesses. Neither the Company or any of its
subsidiaries has received notice from any insurer or agent of such insurer
that substantial capital improvement or other expenditures will have to be
made in order to continue such insurance. All such insurance is outstanding
and duly in force on the date hereof.
(xxvii) Internal Accounting Controls. The Company maintains a system of
internal accounting controls sufficient to provide reasonable assurances
that (a) transactions are executed in accordance with management's general
or specific authorization; (b) transactions are recorded as necessary to
permit preparation of financial
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statements in conformity with generally accepted accounting principles and
to maintain accountability for assets; (c) access to assets is permitted
only in accordance with management's general or specific authorization; and
(d) the recorded accountability for assets is compared with existing assets
at reasonable intervals and appropriate action is taken with respect to any
differences.
(xxviii) Stabilization and Manipulation. None of the Company or any of
its subsidiaries has (a) taken, directly or indirectly, any action designed
to, or that might reasonably be expected to, cause or result in
stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Shares or (b) since the date of the
Offering Memorandum (I) sold, bid for, purchased or paid any person any
compensation for soliciting purchases of, the Shares or (II) paid or agreed
to pay to any person any compensation for soliciting another to purchase any
securities of the Company.
(xxix) Related Party Transactions. Except as disclosed in the
Offering Memorandum, there are no business relationships or related party
transactions required to be disclosed therein pursuant to Item 404 of
Regulation S-K of the Commission (assuming for purposes of this paragraph
(xxix) that Regulation S-K is applicable to the Offering Memorandum).
(b) Officer's Certificates. Any certificate signed by any officer of the
Company or any of its subsidiaries delivered to the Initial Purchasers or to
counsel for the Initial Purchasers shall be deemed a representation and warranty
by the Company to each Initial Purchaser as to the matters covered thereby.
SECTION 2. Sale and Delivery to Initial Purchasers; Closing.
(a) Firm Shares. On the basis of the representations and warranties herein
contained and subject to the terms and conditions herein set forth, the Company
agrees to sell to the Initial Purchasers, and the Initial Purchasers agree to
severally and not jointly purchase from the Company, an aggregate of 2,500,000
Shares at a price of $97.00 per Share. The parties agree that the initial
offering price of the Shares will be $100.00 per Share.
(b) Option Shares. In addition, on the basis of the representations and
warranties herein contained and subject to the terms and conditions herein set
forth, the Company hereby grants an option to the Initial Purchasers, severally
and not jointly, to purchase up to an additional 500,000 Shares, at the price
per Share set forth in Section 2(a) hereof, plus an amount per Share equal to
any accrued and unpaid dividends or distributions from the Closing Time. The
option hereby granted will expire 30 days after the date hereof and may be
exercised in whole or in part only for the purpose of covering over-allotments
which may be made in connection with the offering and distribution of the Firm
Shares upon notice by Merrill Lynch to the Company setting forth the number of
Option Shares as to which the Initial Purchasers are then exercising the option
and the time and date of payment and delivery for such Option Shares. Any such
time and date of delivery for the Option Shares (a "Date of Delivery") shall be
determined by the Merrill Lynch, but shall not be later than seven full business
days after the exercise of said option, nor in any event prior to the Closing
Time, as hereinafter defined. If the option is
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exercised as to all or any portion of the Option Shares, each of the Initial
Purchasers, acting severally and not jointly, on the basis of the
representations and warranties of the Company contained herein and subject to
the terms and conditions herein set forth, will purchase that proportion of the
total number of Option Shares then being purchased which the number of Firm
Shares set forth in Schedule A opposite the name of such Initial Purchasers
bears to the total number of Firm Shares, subject in each case to such
adjustments as Merrill Lynch in its discretion shall make to eliminate any sales
or purchases of fractional shares.
(c) Delivery. Deliveries of certificates for the Firm Shares shall be made
at the offices of Baker & McKenzie in The City of New York or such other place
as shall be agreed upon by the Initial Purchasers and the Company and payment of
the purchase price for the Firm Shares shall be made by the Initial Purchasers
to the Company by wire transfer of immediately available funds contemporaneous
with closing, at 9:00 a.m., New York City time, on March 3, 2000 or such other
time not later than ten (10) business days after such date as shall be agreed
upon by the Initial Purchasers and the Company (such time and date of payment
and delivery being referred to herein as the "Closing Time"). In addition, in
the event that any or all of the Option Shares are purchased by the Initial
Purchasers, payment of the purchase price for such Option Shares shall be made
at the above-mentioned offices, or at such other place as shall be agreed upon
by Merrill Lynch and the Company, on each Date of Delivery as specified in the
notice from Merrill Lynch to the Company.
(d) Payment. Payment for the Shares purchased by the Initial Purchasers
shall be made to the Company by wire transfer of immediately available funds to
a bank designated by the Company, against delivery to the Initial Purchasers of
certificates for the Shares to be purchased by them. Unless otherwise specified
in writing by the Initial Purchasers prior to the Closing Time or the relevant
Date of Delivery, as the case may be, the Firm Shares and Option Shares, if any,
shall be issued in global form as one or more certificates registered in the
name of Cede & Co. as nominee of DTC pursuant to the DTC Agreement and shall be
made available for examination by the Initial Purchasers in The City of New York
at least one (1) business day prior to the Closing Time or the relevant Date of
Delivery, as the case may be.
(e) Qualified Institutional Buyer. Each Initial Purchaser severally and
not jointly represents and warrants to, and agrees with, the Company that, as of
the date hereof and as of the Closing Date, it is a "qualified institutional
buyer" within the meaning of Rule 144A under the 1933 Act (a "Qualified
Institutional Buyer") and an "accredited investor" within the meaning of Rule
501(a) under the 1933 Act (an "Accredited Investor").
SECTION 3. Covenants of the Company. The Company covenants with each
Initial Purchaser as follows:
(a) Offering Memorandum. The Company, as promptly as possible, will
furnish to each Initial Purchaser, without charge, such number of copies of the
Preliminary Offering Memorandum, the Final Offering Memorandum and any
amendments and supplements thereto and documents incorporated by reference
therein as such Initial Purchaser may reasonably request.
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(b) Notice and Effect of Material Events. The Company will immediately
notify each Initial Purchaser, and confirm such notice in writing, of (x) any
filing made by the Company of information relating to the offering of the Shares
with any securities exchange or any other regulatory body in the United States
or any other jurisdiction, and (y) prior to the completion of the placement of
the Shares by the Initial Purchasers as evidenced by a notice in writing from
the Initial Purchasers to the Company, any material changes in or affecting the
earnings, business affairs or business prospects of the Company and its
subsidiaries which (i) make any statement in the Offering Memorandum false or
misleading or (ii) are not disclosed in the Offering Memorandum. In such event
or if during such time any event shall occur as a result of which it is
necessary, in the reasonable opinion of the Company, its counsel, the Initial
Purchasers or counsel for the Initial Purchasers, to amend or supplement the
Final Offering Memorandum in order that the Final Offering Memorandum not
include any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein not misleading in the light of
the circumstances then existing, the Company will forthwith amend or supplement
the Final Offering Memorandum by preparing and furnishing to each Initial
Purchaser an amendment or amendments of, or a supplement or supplements to, the
Final Offering Memorandum (in form and substance satisfactory in the reasonable
opinion of counsel for the Initial Purchasers) so that, as so amended or
supplemented, the Final Offering Memorandum will not include an untrue statement
of a material fact or omit to state a material fact necessary in order to make
the statements therein, in the light of the circumstances existing at the time
it is delivered to a Subsequent Purchaser, not misleading.
(c) Amendment to Offering Memorandum and Supplements. The Company will
advise each initial Purchaser promptly of any proposal to amend or supplement
the Offering Memorandum and will not effect such amendment or supplement without
the consent of the Initial Purchasers. Neither the consent of the Initial
Purchasers, nor the Initial Purchasers' delivery of any such amendment or
supplement, shall constitute a waiver of any of the conditions set forth in
Section 5 hereof.
(d) Qualification of Shares for Offer and Sale. The Company will use its
best efforts, in cooperation with the Initial Purchasers, to qualify the Shares
for offering and sale by the Initial Purchasers to any Subsequent Purchasers
under the applicable securities laws of such jurisdictions as the Initial
Purchasers may reasonably designate and will maintain such qualifications in
effect as long as required for the sale of the Shares; provided, however, that
the Company shall not be obligated to file any general consent to service of
process or to qualify as a foreign corporation or as a dealer in securities in
any jurisdiction in which it is not so qualified or to subject itself to
taxation in respect of doing business in any jurisdiction in which it is not
otherwise so subject.
(e) DTC and PORTAL. The Company will cooperate with the Initial Purchasers
and use its reasonable best efforts to (i) permit the Shares to be eligible for
clearance and settlement through the facilities of DTC and (ii) permit the
Shares to be designated as PORTAL Securities in accordance with the ruled and
regulations of the National Association of Securities Dealers, Inc.
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(f) Use of Proceeds. The Company will use the net proceeds received by it
from the sale of the Shares in the manner specified in the Offering Memorandum
under "Use of Proceeds".
(g) Restrictions on Sale of Securities. During a period of 90 days from
the date of the Offering Memorandum, the Company will not, without the prior
written consent of Merrill Lynch, (i) directly or indirectly, offer, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase or
otherwise transfer or dispose of any equity securities or equity-linked
securities of the Company or any securities convertible into or exercisable or
exchangeable for any of the foregoing or file any registration statement under
the 1933 Act with respect to any of the foregoing or (ii) enter into any swap or
any other agreement or any transaction that transfers, in whole or in part,
directly or indirectly, the economic consequence of ownership of any of the
foregoing, whether any such swap or transaction described in clause (i) or (ii)
above is to be settled by delivery of Common Stock or such other securities, in
cash or otherwise. The foregoing sentence shall not apply to (A) the Shares to
be sold hereunder, (B) any shares of Common Stock issued by the Company upon the
exercise of an option or warrant or the conversion of a security outstanding on
the date hereof and referred to in the Offering Memorandum, (C) any shares of
Common Stock issued or options to purchase Common Stock granted pursuant to
existing employee benefit plans of the Company referred to in the Offering
Memorandum, (D) any shares of Common Stock issued pursuant to any non-employee
director stock plan or dividend reinvestment plan or (E) any shares of Common
Stock delivered by the Company to a transfer agent to pay cash dividends on the
Shares.
(h) Reservation of Common Stock. The Company will reserve and keep
available at all times, free of any preemptive rights, shares of Common Stock
for the purpose of enabling the Company to satisfy any obligations to issue
shares of Common Stock upon conversion of the Shares.
(i) Press Releases. From the date hereof to the Closing Time, without the
prior consent of the Initial Purchasers, the Company will not issue directly or
indirectly any press release or other public communication or hold any press
conference with respect to the Company or the business, financial condition,
assets, results of operations or prospects of the Company, unless in the
judgment of the Company and its counsel, and after notification to the Initial
Purchasers, such press release, communication or conference is required by law.
SECTION 4. Payment of Expenses.
(a) Expenses. The Company will pay all expenses incident to the performance
of its obligations under this Agreement, including (i) the preparation, printing
and any filing of the Offering Memorandum (including financial statements and
any schedules or exhibits) and of each amendment or supplement thereto, (ii) the
preparation, printing and delivery to the Initial Purchasers of the Operative
Documents and such other documents as may be required in connection with the
offering, purchase, sale and delivery of the Shares, (iii) the preparation,
issuance and delivery of the certificates for the Shares to the Initial
Purchasers, including any charges of DTC in connection therewith, (iv) the fees
and disbursements of the Company's counsel, accountants and other advisors, (v)
the qualification of the Shares under securities laws
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in accordance with the provisions of Section 3(d) hereof, (vi) any fees payable
in connection with the rating of the Shares and (vii) any fees payable to the
review by the National Association of Securities Dealers, Inc. (the "NASD") in
connection with the initial and continued designation of the Shares as PORTAL
securities under the PORTAL Market Rules pursuant to NASD Rule 5322.
(b) Termination of Agreement. If this Agreement is terminated by the
Initial Purchasers in accordance with the provisions of Section 5(k) or Section
10(a)(i) hereof, the Company shall reimburse the Initial Purchasers for all of
their out-of-pocket expenses, including the reasonable fees and disbursements of
counsel for the Initial Purchasers.
SECTION 5. Conditions of Initial Purchasers' Obligations. The obligations of
the several Initial Purchasers hereunder are subject to the accuracy of the
representations and warranties of the Company contained in Section 1 hereof or
in certificates of any officer of the Company or any of its subsidiaries
delivered pursuant to the provisions hereof, to the performance by the Company
of its covenants and other obligations hereunder, and to the following further
conditions:
(a) Opinions of Counsel for Company. At the Closing Time, the Initial
Purchasers shall have received the opinions, dated as of the Closing Time, (i)
of Brobeck, Phleger & Harrison LLP, counsel for the Company, to the effect set
forth in Exhibit A-1 hereto, (ii) of Hale and Dorr LLP, counsel for the Company,
to the effect set forth in Exhibit A-2 hereto, (iii) of Blumenfeld & Cohen,
counsel for the Company, to the effect set forth in Exhibit A-3 hereto, (iv) of
Leboeuf, Lamb, Greene & MacRae L.L.P., counsel for the Company, to the effect
set forth on Exhibit A-4 hereto and (v) of Jeffrey Blumenfeld, General Counsel
of the Company, to the effect set forth on Exhibit A-5 hereto. In giving the
opinion described in clause (i) above such counsel may rely, as to all matters
governed by the laws of jurisdictions other than the law of the State of New
York, the federal law of the United States and the General Corporation Law of
the State of Delaware, upon the opinions of counsel satisfactory to the Initial
Purchasers.
(b) Opinion of Counsel for Initial Purchasers. At the Closing Time, the
Initial Purchasers shall have received the favorable opinion, dated as of the
Closing Time, of Baker & McKenzie, counsel for the Initial Purchasers,
substantially to the effect set forth in Exhibit A-6 hereto. In giving such
opinion such counsel may rely, as to all matters governed by the laws of
jurisdictions other than the law of the State of New York, the federal law of
the United States and the General Corporation Law of the State of Delaware, upon
the opinions of counsel satisfactory to the Initial Purchasers.
(c) Officers' Certificate. At the Closing Time, there shall not have been,
since the date hereof or since the respective dates as of which information is
given in the Offering Memorandum, any material adverse change in the condition,
financial or otherwise, or in the earnings, business affairs or business
prospects of the Company and its subsidiaries considered as one enterprise,
whether or not arising in the ordinary course of business, and the Initial
Purchasers shall have received a certificate of the President or a Vice
President of the Company and of the chief financial or chief accounting officer
of the Company, dated as of the Closing Time, to the effect that (i) there has
been no such material adverse change, (ii) the representations and warranties in
Section 1 hereof are true and correct with the same force and
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effect as though expressly made at and as of the Closing Time and (iii) the
Company has complied with all agreements and satisfied all conditions on its
part to be performed or satisfied at or prior to the Closing Time.
(d) Accountant's Comfort Letter. At the time of the execution of this
Agreement, the Initial Purchasers shall have received from
PricewaterhouseCoopers LLP a letter dated such date, in form and substance
satisfactory to the Initial Purchasers, containing statements and information of
the type ordinarily included in accountants' "comfort letters" to Initial
Purchasers with respect to the financial statements and certain financial
information contained in the Offering Memorandum.
(e) Bring-down Comfort Letter. At the Closing Time, the Initial Purchasers
shall have received from PricewaterhouseCoopers LLP a letter, dated as of the
Closing Time, to the effect that they reaffirm the statements made in the letter
furnished pursuant to subsection (d) of this Section, except that the specified
date referred to shall be a date not more than three business days prior to the
Closing Time.
(f) PORTAL. At the Closing Time, the Shares shall have been designated for
trading on PORTAL.
(g) Registration Rights Agreements. The Issuer and the Initial Purchasers
shall have entered into the Registration Rights Agreement, dated as of the
Closing Time, substantially in form and substance as described in the Offering
Memorandum under the heading "Description of the Preferred Stock--Registration
Rights."
(h) Lock-up Agreements. At the Closing Time, the Initial Purchasers shall
have received an agreement substantially in the form of Exhibit B hereto signed
by the persons listed on Schedule B hereto.
(i) Conditions to Purchase of Option Shares. In the event that the Initial
Purchasers exercise their option provided in Section 2(b) hereof to purchase all
or any portion of the Option Shares, the representations and warranties of the
Company contained herein and the statements in any certificates furnished by the
Company and any subsidiary of the Company hereunder shall be true and correct as
of each Date of Delivery and, at the relevant Date of Delivery, the Initial
Purchasers shall have received:
(i) Officers' Certificate. A certificate, dated such Date of
Delivery, of the President or a Vice President of the Company and of the
chief financial or chief accounting officer of the Company confirming that
the certificate delivered at the Closing Time pursuant to Section 5(c)
hereof remains true and correct as of such Date of Delivery.
(ii) Opinions of Counsel for the Company. At the relevant Date of
Delivery, the Initial Purchasers shall have received the opinions, dated as
of such Date of Delivery, of each of Brobeck, Phleger & Harrison LLP, Hale
and Dorr LLP, Blumenfeld & Cohen, Leboeuf, Lamb, Greene & MacRae L.L.P. and
of Jeffrey Blumenfeld, each in form and substance to the effect set froth in
Exhibits A-1 through A-5 hereof. In giving the opinion pursuant to this
subsection, Brobeck Phleger & Harrison LLP may rely, as to all matters
governed by the laws of
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jurisdictions other than the law of the State of New York, the federal law
of the United States and the General Corporation Law of the State of
Delaware, upon the opinions of counsel satisfactory to the Initial
Purchasers.
(iii) Opinion of Counsel for Initial Purchasers. At the relevant Date
of Delivery, the Initial Purchasers shall have received the favorable
opinion, dated as of such Date of Delivery of Baker & McKenzie, counsel for
the Initial Purchasers, substantially to the effect set forth in Exhibit A-6
hereto. In giving such opinion such counsel may rely, as to all matters
governed by the laws of jurisdictions other than the law of the State of New
York, the federal law of the United States and the General Corporation Law
of the State of Delaware, upon the opinions of counsel satisfactory to the
Initial Purchasers.
(iv) Bring-down Comfort Letter. At the relevant Date of Delivery, the
Initial Purchasers shall have received from PricewaterhouseCoopers LLP a
letter, dated as of such Date of Delivery, to the effect that they reaffirm
the statements made in the letter furnished pursuant to subsection (e) of
this Section, except that the specified date referred to shall be a date not
more than three business days prior to such Date of Delivery.
(j) Additional Documents. At the Closing Time and at each Date of Delivery,
counsel for the Initial Purchasers shall have been furnished such documents and
opinions as they may reasonably require for the purpose of enabling them to pass
upon the issuance and sale of the Shares as herein contemplated, or in order to
evidence the accuracy of any of the representations or warranties of the
Company, or the fulfillment of any of the conditions, herein contained; and all
proceedings taken by the Company in connection with the issuance and sale of the
Shares as herein contemplated shall be satisfactory in form and substance to the
Initial Purchasers and counsel for the Initial Purchasers.
(k) Termination of Agreement. If any condition specified in this Section 5
shall not have been fulfilled when and as required to be fulfilled, this
Agreement, or, in the case of any condition to the purchase of Option Shares on
a Date of Delivery which is after the Closing Time, the obligations of the
Initial Purchasers to purchase the relevant Option Shares, may be terminated by
the Initial Purchasers by notice to the Company at any time at or prior to the
Closing Time or such Date of Delivery, as the case may be, and such termination
shall be without liability of any party to any other party except as provided in
Section 4 hereof and except that Sections 1, 7, 8 and 9 hereof shall survive any
such termination and remain in full force and effect.
SECTION 6. Subsequent Offers and Resales of the Shares.
(a) Offer and Sale Procedures. Each of the Initial Purchasers and the
Company hereby acknowledge and agree to observe the following procedures in
connection with the offer and sale of the Shares:
(i) Offers and Sales only to Qualified Institutional Buyers. Offers
and sales of the Shares will be made only by the Initial Purchasers or
Affiliates thereof qualified to do so in the jurisdictions in which such
offers or sales are made. Each such offer or sale
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shall only be made to persons whom the offeror or seller reasonably believes
to be qualified institutional buyers (as defined in Rule 144A under the 1933
Act).
(ii) No General Solicitation. The Shares will be offered by
approaching prospective Subsequent Purchasers on an individual basis. No
general solicitation or general advertising (within the meaning of Rule
502(c) under the 1933 Act) will be used in the United States in connection
with the offering of the Shares.
(iii) Purchases by Non-Bank Fiduciaries. In the case of a non-bank
Subsequent Purchaser of Shares acting as a fiduciary for one or more third
parties, in connection with an offer and sale to such purchaser pursuant to
clause (a) above, each third party shall, in the judgment of the applicable
Initial Purchaser, be a Qualified Institutional Buyer.
(iv) Subsequent Purchaser Notification. Each Initial Purchaser will
take reasonable steps to inform, and cause each of its Affiliates to take
reasonable steps to inform, persons acquiring Shares from such Initial
Purchaser or Affiliate, as the case may be, in the United States that the
Shares (A) have not been registered under the 1933 Act and have not been
registered under any state securities laws, (B) are being sold to them
without registration under the 1933 Act in reliance on Rule 144A or in
accordance with another exemption from registration under the 1933 Act, as
the case may be, and (C) may not be offered, sold or otherwise transferred
except (1) to the Company, (2) pursuant to an effective registration
statement under the 1933 Act, (3) outside the United States in accordance
with Rule 904 of Regulation S, or (4) inside the United States in accordance
with (x) Rule 144A to a person whom the seller reasonably believes is a
Qualified Institutional Buyer that is purchasing such Shares for its own
account or for the account of a Qualified Institutional Buyer to whom notice
is given that the offer, sale or transfer is being made in reliance on Rule
144A or (y) the exemption from registration under the 1933 Act provided by
Rule 144, if available.
(v) Restrictions on Transfer. The transfer restrictions and the
other provisions of this Agreement and the Offering Memorandum, including
the legend required thereby, shall apply to the Shares except as otherwise
agreed by the Company and the Initial Purchasers. Following the sale of the
Shares by the Initial Purchasers to Subsequent Purchasers in accordance with
the terms and procedures contained herein, the Initial Purchasers shall not
be liable or responsible to the Company for any losses, damages or
liabilities suffered or incurred by the Company, including any losses,
damages or liabilities under the 1933 Act, arising from or relating to any
resale or transfer of any Share.
(vi) Delivery of Offering Memorandum. Each Initial Purchaser will
deliver to each purchaser of the Shares from such Initial Purchaser, in
connection with its original distribution of the Shares, a copy of the
Offering Memorandum, as amended and supplemented at the date of such
delivery.
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(b) Covenants of the Company. The Company covenants with each Initial
Purchaser as follows:
(i) Due Diligence. In connection with the original distribution of
the Shares, the Company agrees that, prior to any offer or resale of the
Shares by the Initial Purchasers, the Initial Purchasers and counsel for the
Initial Purchasers shall have the right to make reasonable inquiries into
the business of the Company and its subsidiaries. The Company also agrees to
provide answers to each prospective Subsequent Purchaser of Shares who so
requests concerning the Company and its subsidiaries (to the extent that
such information is available or can be acquired and made available to
prospective Subsequent Purchasers without unreasonable effort or expense and
to the extent the provision thereof is not prohibited by applicable law) and
the terms and conditions of the offering of the Shares, as provided in the
Offering Memorandum.
(ii) Integration. The Company agrees that it will not and will cause
its Affiliates not to make any offer or sale of securities of the Company of
any class if, as a result of the doctrine of "integration" referred to in
Rule 502 under the 1933 Act, such offer or sale would render invalid (for
the purpose of (i) the sale of the Shares by the Company to the Initial
Purchasers, (ii) the resale of the Shares by the Initial Purchasers to
Subsequent Purchasers or (iii) the resale of the Shares by such Subsequent
Purchasers to others, in each case in accordance with the terms and
conditions herein set forth) the exemption from the registration
requirements of the 1933 Act provided by Section 4(2) thereof or by Rule
144A thereunder or otherwise.
(iii) Rule 144A Information. The Company agrees that, in order to
render the Shares eligible for resale pursuant to Rule 144A under the 1933
Act, while any of the Shares remain outstanding, it will make available,
upon request, to any holder of Shares or prospective purchasers of Shares
the information specified in Rule 144A(d)(4), unless the Company furnishes
information to the Commission pursuant to Section 13 or 15(d) of the 1934
Act (such information, whether made available to holders or prospective
purchasers or furnished to the Commission, is herein referred to as
"Additional Information").
(iv) Restriction on Repurchases. Until the expiration of two years
after the original issuance of the Shares, the Company will not, and will
cause its Affiliates not to, purchase or agree to purchase or otherwise
acquire any Shares which are "restricted securities" (as such term is
defined under Rule 144(a)(3) under the 1933 Act), whether as beneficial
owner or otherwise (except as agent acting as a securities broker on behalf
of and for the account of customers in the ordinary course of business in
unsolicited broker's transactions).
(c) Resale Pursuant to Rule 144A. Each Initial Purchaser represents and
agrees, that, except as permitted by Section 6(a) above, it has offered and sold
Shares and will offer and sell Shares as part of their distribution at any time,
only in accordance with Rule 144A under the 1933 Act. Each Initial Purchaser
severally represents and agrees that it has not entered and will not enter into
any contractual arrangements with respect to the distribution of the Shares,
except with its affiliates or with the prior written consent of the Company.
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SECTION 7. Indemnification.
(a) Indemnification of Initial Purchasers. The Company agrees to indemnify
and hold harmless each Initial Purchaser and each person, if any, who controls
any Initial Purchaser within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement of a material fact contained in the Final Offering
Memorandum (or any amendment or supplement thereto), or the omission or
alleged omission therefrom of a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading;
(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission; provided that (subject to Section 7(d)
below) any such settlement is effected with the written consent of the
Company; and
(iii) against any and all expense whatsoever, as incurred (including
the fees and disbursements of counsel chosen by Merrill Lynch), reasonably
incurred in investigating, preparing or defending against any litigation, or
any investigation or proceeding by any governmental agency or body,
commenced or threatened, or any claim whatsoever based upon any such untrue
statement or omission, or any such alleged untrue statement or omission, to
the extent that any such expense is not paid under (i) or (ii) above;
provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by any
Initial Purchaser expressly for use in the Offering Memorandum (or any amendment
thereto), which information is described in Section 1(a)(ii) hereof; and
provided further that the Company will not be liable to an Initial Purchaser
with respect to any Preliminary Offering Memorandum to the extent that the
Company shall sustain the burden of proof of proving that any such loss,
liability, claim, damage or expense resulted from the fact that such Initial
Purchaser, in contravention of a requirement of this Agreement or applicable
law, sold Shares to a person to whom such Initial Purchaser failed to send or
give, at or prior to the Closing Date, a copy of the Final Offering Memorandum
as then amended or supplemented if (i) the Company has previously furnished
copies thereof (sufficiently in advance of the Closing Date to allow for the
distribution by the Closing Date) to the Initial Purchasers and the loss,
liability, claim, damage or expense of such Initial Purchaser resulted from an
untrue statement or omission or alleged untrue statement or omission of a
material fact contained in or omitted from the Preliminary Offering Memorandum
which was corrected in the Final Offering Memorandum as, if applicable, amended
or supplemented prior to the Closing Date and (ii) giving or sending such Final
Offering Memorandum by the Closing Date to the party or parties
20
<PAGE>
asserting such loss, liability, claim, damage or expense would have constituted
a complete defense to the claim asserted by such person.
(b) Indemnification of Company, Directors and Officers. Each Initial
Purchaser severally agrees to indemnify and hold harmless the Company, its
directors, each of its officers who would be required to sign the Offering
Memorandum if it were a registration statement on Form S-1, and each person, if
any, who controls the Company within the meaning of Section 15 of the 1933 Act
or Section 20 of the 1934 Act against any and all loss, liability, claim, damage
and expense described in the indemnity contained in subsection (a) of this
Section, as incurred, but only with respect to untrue statements or omissions,
or alleged untrue statements or omissions, made in the Offering Memorandum in
reliance upon and in conformity with written information furnished to the
Company by such Initial Purchaser expressly for use in the Offering Memorandum.
(c) Actions against Parties; Notification. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve such
indemnifying party from any liability hereunder to the extent it is not
materially prejudiced as a result thereof and in any event shall not relieve it
from any liability which it may have otherwise than on account of this indemnity
agreement. In the case of parties indemnified pursuant to Section 7(a) above,
counsel to the indemnified parties shall be selected by Merrill Lynch, and, in
the case of parties indemnified pursuant to Section 7(b) above, counsel to the
indemnified parties shall be selected by the Company. An indemnifying party may
participate at its own expense in the defense of any such action; provided,
however, that counsel to the indemnifying party shall not (except with the
consent of the indemnified party) also be counsel to the indemnified party. In
no event shall the indemnifying parties be liable for fees and expenses of more
than one counsel (in addition to any local counsel) separate from their own
counsel for all indemnified parties in connection with any one action or
separate but similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances. No indemnifying party shall,
without the prior written consent of the indemnified parties, settle or
compromise or consent to the entry of any judgment with respect to any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever in respect of which
indemnification or contribution could be sought under this Section 7 or Section
8 hereof (whether or not the indemnified parties are actual or potential parties
thereto), unless such settlement, compromise or consent (i) includes an
unconditional release of each indemnified party from all liability arising out
of such litigation, investigation, proceeding or claim and (ii) does not include
a statement as to or an admission of fault, culpability or a failure to act by
or on behalf of any indemnified party.
(d) Settlement without Consent if Failure to Reimburse. If at any time an
indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel, such indemnifying party
agrees that it shall be liable for any settlement of the nature contemplated by
Section 7(a)(ii) effected without its written consent if (i) such settlement is
entered into more than 45 days after receipt by such indemnifying party of the
aforesaid request, (ii) such indemnifying party shall have received notice of
the terms of such settlement at least 30 days prior to such settlement being
entered into and (iii) such indemnifying
21
<PAGE>
party shall not have reimbursed such indemnified party in accordance with such
request prior to the date of such settlement.
SECTION 8. Contribution. If the indemnification provided for in Section 7
hereof is for any reason unavailable to or insufficient to hold harmless an
indemnified party in respect of any losses, liabilities, claims, damages or
expenses referred to therein, then each indemnifying party shall contribute to
the aggregate amount of such losses, liabilities, claims, damages and expenses
incurred by such indemnified party, as incurred, (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company on the one
hand and the Initial Purchasers on the other hand from the offering of the
Shares pursuant to this Agreement or (ii) if the allocation provided by clause
(i) is not permitted by applicable law, in such proportion as is appropriate to
reflect not only the relative benefits referred to in clause (i) above but also
the relative fault of the Company on the one hand and of the Initial Purchasers
on the other hand in connection with the statements or omissions which resulted
in such losses, liabilities, claims, damages or expenses, as well as any other
relevant equitable considerations.
The relative benefits received by the Company on the one hand and the
Initial Purchasers on the other hand in connection with the offering of the
Shares pursuant to this Agreement shall be deemed to be in the same respective
proportions as the total net proceeds from the offering of the Shares pursuant
to this Agreement (before deducting expenses) received by the Company and the
total underwriting discount received by the Initial Purchasers, bear to the
aggregate initial offering price of the Shares.
The relative fault of the Company on the one hand and the Initial
Purchasers on the other hand shall be determined by reference to, among other
things, whether any such untrue or alleged untrue statement of a material fact
or omission or alleged omission to state a material fact relates to information
supplied by the Company or by the Initial Purchasers and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission.
The Company and the Initial Purchasers agree that it would not be just and
equitable if contribution pursuant to this Section 8 were determined by pro rata
allocation (even if the Initial Purchasers were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 8. The aggregate
amount of losses, liabilities, claims, damages and expenses incurred by an
indemnified party and referred to above in this Section 8 shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue or alleged untrue
statement or omission or alleged omission.
Notwithstanding the provisions of this Section 8, no Initial Purchaser
shall be required to contribute any amount in excess of the amount by which the
total price at which the Shares underwritten by it and distributed pursuant to
this Agreement were offered to the Subsequent Purchasers exceeds the amount of
any damages which such Initial Purchaser has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission.
22
<PAGE>
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 8, each person, if any, who controls an Initial
Purchaser within the meaning of Section 15 of the 1933 Act or Section 20 of the
1934 Act shall have the same rights to contribution as such Initial Purchaser,
and each director of the Company, each officer of the Company who would be
required to sign the Offering Memorandum if it were a registration statement on
Form S-1, and each person, if any, who controls the Company within the meaning
of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same
rights to contribution as the Company. The Initial Purchasers' respective
obligations to contribute pursuant to this Section 8 are several in proportion
to the number of Firm Shares set forth opposite their respective names in
Schedule A hereto and not joint.
SECTION 9. Representations, Warranties and Agreements to Survive Delivery.
All representations, warranties and agreements contained in this Agreement or in
certificates of officers of the Company submitted pursuant hereto, shall remain
operative and in full force and effect, regardless of any investigation made by
or on behalf of any Initial Purchaser or controlling person, or by or on behalf
of the Company, and shall survive delivery of the Shares to the Initial
Purchasers.
SECTION 10. Termination of Agreement.
(a) Termination; General. The Initial Purchasers may terminate this
Agreement, by notice to the Company, at any time at or prior to the Closing Time
(i) if there has been, since the time of execution of this Agreement or since
the respective dates as of which information is given in the Offering
Memorandum, any material adverse change in the condition, financial or
otherwise, or in the earnings, business affairs or business prospects of the
Company and its subsidiaries considered as one enterprise, whether or not
arising in the ordinary course of business, or (ii) if there has occurred any
material adverse change in the financial markets in the United States or the
international financial markets, any outbreak of hostilities or escalation
thereof or other calamity or crisis or any change or development involving a
prospective change in national or international political, financial or economic
conditions, in each case the effect of which is such as to make it, in the
judgment of the Initial Purchasers, impracticable to market the Shares or to
enforce contracts for the sale of the Shares, or (iii) if trading in any
securities of the Company has been suspended or limited by the Commission, or if
trading generally on the American Stock Exchange or the New York Stock Exchange
or in the Nasdaq National Market has been suspended or limited, or minimum or
maximum prices for trading have been fixed, or maximum ranges for prices have
been required, by any of said exchanges or by such system or by order of the
Commission, the National Association of Securities Dealers, Inc. or any other
governmental authority, or (iv) if a banking moratorium has been declared by
either Federal or New York authorities.
(b) Liabilities. If this Agreement is terminated pursuant to this Section,
such termination shall be without liability of any party to any other party
except as provided in Section 4 hereof, and provided further that Sections 1, 7
and 8 shall survive such termination and remain in full force and effect.
23
<PAGE>
SECTION 11. Default by One or More of the Initial Purchasers. If one of the
Initial Purchasers shall fail at the Closing Time or a Date of Delivery to
purchase the Shares which it is obligated to purchase under this Agreement (the
"Defaulted Shares"), the other Initial Purchaser shall have the right, but not
the obligation, within 24 hours thereafter, to make arrangements, for the non-
defaulting Initial Purchaser, or any other Initial Purchasers, to purchase all,
but not less than all, of the Defaulted Shares in such amounts as may be agreed
upon and upon the terms herein set forth; if, however, the other Initial
Purchaser shall not have completed such arrangements within such 24-hour period,
then this Agreement shall terminate without liability on the part of the non-
defaulting Initial Purchaser.
No action pursuant to this Section shall relieve any defaulting Initial
Purchaser from liability in respect of its default.
In the event of any such default which does not result in a termination of
this Agreement, either the non-defaulting Initial Purchaser or the Company shall
have the right to postpone the Closing Time or the relevant Date of Delivery, as
the case may be, for a period not exceeding seven days in order to effect any
required changes in the Offering Memorandum or in any other documents or
arrangement.
SECTION 12. Notices. All notices and other communications hereunder shall
be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the Initial
Purchasers shall be directed to the Initial Purchasers at North Tower, World
Financial Center, New York, New York 10281-11201, attention of Paul Pepe, with a
courtesy copy to Malcolm I. Ross, Baker & McKenzie, 805 Third Avenue, New York,
New York 10022; notices to the Company shall be directed to it at 6933 South
Revere Parkway, Englewood, Colorado 80112, attention of Scott Chandler, with a
courtesy copy to Richard R. Plumridge, Brobeck Phleger & Harrison LLP, 370
Interlocken Boulevard, Suite 500, Broomfield, Colorado 80021.
SECTION 13. Parties. This Agreement shall inure to the benefit of and be
binding upon the Initial Purchasers and the Company and their respective
successors. Nothing expressed or mentioned in this Agreement is intended or
shall be construed to give any person, firm or corporation, other than the
Initial Purchasers and the Company and their respective successors and the
controlling persons and officers and directors referred to in Sections 7 and 8
and their heirs and legal representatives, any legal or equitable right, remedy
or claim under or in respect of this Agreement or any provision herein
contained. This Agreement and all conditions and provisions hereof are intended
to be for the sole and exclusive benefit of the Initial Purchasers and the
Company and their respective successors, and said controlling persons and
officers and directors and their heirs and legal representatives, and for the
benefit of no other person, firm or corporation. No purchaser of Shares from any
Initial Purchaser shall be deemed to be a successor by reason merely of such
purchase.
SECTION 14. Governing Law and Time. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. SPECIFIED TIMES
OF DAY REFER TO NEW YORK CITY TIME.
24
<PAGE>
SECTION 15. Effect of Headings. The Article and Section headings herein and
the Table of Contents are for convenience only and shall not affect the
construction hereof.
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to the Company a counterpart hereof, whereupon this
instrument, along with all counterparts, will become a binding agreement between
the Initial Purchasers and the Company in accordance with its terms.
Very truly yours,
RHYTHMS NETCONNECTIONS, INC.
By:
-------------------------------------
Scott Chandler
Chief Financial Officer
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
SALOMON SMITH BARNEY INC.
By: MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By:
------------------------------------
Authorized Signatory
25
<PAGE>
SCHEDULE A
Name of Initial Purchaser Number of Firm Shares
-------------------------- ---------------------
Merrill Lynch, Pierce, Fenner & Smith Incorporated....... 1,375,000
Salomon Smith Barney Inc................................. 1,125,000
Total................................................. 2,500,000
=========
26
<PAGE>
SCHEDULE B
Brentwood Affiliates Fund, L.P.
Brentwood Associates VII, L.P.
Kleiner Perkins Caulfield & Byers VIII, L.P.
KPCB VIII Founders Fund, L.P.
KPCB VIII Information Sciences Zaibatsu Fund II, L.P.
MCI WorldCom Venture Fund, Inc.
G-Past, L.L.C.
Microsoft Corporation
Catherine M. Hapka
Steve Stringer
Michael S. Lanier
David J. Shimp
Scott C. Chandler
Kevin R. Compton
Keith B. Geeslin
Susan Mayer
William R. Stensrud
John L. Walecka
Edward J. Zander
27
<PAGE>
Exhibit A-1
FORM OF OPINION OF COMPANY'S LEGAL COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(a)(i)
[Form of Brobeck Phleger opinion follows]
A-1
<PAGE>
Exhibit A-2
FORM OF OPINION OF COMPANY'S LEGAL COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(a)(ii)
[Form of Hale and Dorr opinion follows]
A-2
<PAGE>
Exhibit A-3
FORM OF OPINION OF COMPANY'S LEGAL COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(a)(iii)
[Form of Blumenfeld & Cohen opinion follows]
A-3
<PAGE>
Exhibit A-4
FORM OF OPINION OF COMPANY'S LEGAL COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(a)(iv)
[Form of LeBoeuf Lamb opinion follows]
A-4
<PAGE>
Exhibit A-5
FORM OF OPINION OF THE COMPANY'S LEGAL COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(a)(v)
[Form of General Counsel opinion follows]
A-5
<PAGE>
Exhibit A-6
FORM OF OPINION OF INITIAL PURCHASERS' LEGAL COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(b)
[Form of Baker & McKenzie opinion follows]
A-6
<PAGE>
Exhibit B
Form of Lock-Up Agreement
A-7
<PAGE>
1
EXHIBIT 10.37
10/13/98
R H Y T H M S
October 13, 1998
Dave Shimp
230 Norwich Court
Lake Bluff, IL 60044
Subject: Offer of Employment with RHYTHMS NetConnections, Inc.
Dear Dave:
It gives me great pleasure to offer you employment with RHYTHMS, NetConnections
Inc. (RHYTHMS or the Company) This letter will serve to outline the basic terms
of your employment.
1. Start of Employment: The effective date of your employment will be October
16,1998.
2. Your title will be Chief Marketing Officer. You will report directly to me.
This offer is subject to approval of the Compensation Committee of Rhythms
Board of Directors.
3. Compensation: Your annual salary will be $175,000. You will be eligible for
all standard company benefits.
4. Bonus: You will be eligible for the 1998 Bonus Plan of 25% of your base
salary.
5. Stock: Subject to approval by the Board of Directors, you will be granted
options to purchase 125,000 shares of Common Stock, at start of
employment, at an exercise share equal to the fair market price of a
share of the Company's common stock on the date the option is granted.
The Board establishes the fair market price of a share of Common Stock.
The fair market price of a share of Common Stock is generally in the
range of 70%-75% of the value of a share of the Company's Preferred
Stock, which was recently valued at $5.00 per share. Twenty five
percent (25%) of the options will vest on the first anniversary of your
start date and the remaining seventy five percent (75%) will vest
thereafter on a monthly basis over the succeeding three (3) year
period, total vesting period four (4) years.
<PAGE>
2
10/13/98
R H Y T H M S
6. Miscellaneous: a) Signing Bonus;TBD (function of cash collections
negotiation With Ward Howell-LAI quotes fee analysis and schedule of bonus.) b)
The Company will provide a company apartment for one year. c) The Company will
provide a lease vehicle for use in Denver, CO. d) The Company will provide
airfare to commute weekends to Chicago, Ill. e) Line of credit concept for an
employee loan (maximum of $50K, 10% interest, payable eighteen (18) months
after date of hire.) f) Eligible for relocation expenses, approximately $80K,
if/when relocation to Denver, CO.
Employment with RHYTHMS will not be for a specified term and can be terminated
by you or by the Company at any time for any reason, with or without cause, and
with or without notice. Any contrary representations which may have been made or
which may be made to you are/will be superseded by this offer. The "at will"
nature of your employment described in this offer letter will constitute the
entire agreement between you and the Company concerning the duration of your
employment and the circumstances under which you or the Company may terminate
the employment relationship. Although your job duties, title, compensation and
benefits may change over time, the "at will" term of your employment can only be
changed in writing and signed by you and the President of the Company. If you
accept this offer, the terms described in this letter will be the terms of your
employment. This offer, is contingent on you executing the RHYTHMS Proprietary
Information and Inventions Agreement and Non-Competition Agreement, copies of
which are attached here to and incorporated by reference. The terms of this
letter and your employment will be governed by the laws of the State of
Colorado. In compliance with the Federal Immigration Reform Act, your employment
pursuant to this offer is contingent on your providing the legal required proof
of your identity and authorization to work in the United States.
Assuming this offer letter is acceptable to you, please sign and return to me,
along with signed copies of the Employee Proprietary Information and Inventions
Agreement and Covenant Not to Compete, which are enclosed.
<PAGE>
Catherine Hapka
President & CEO
Dave, we believe we have an excellent opportunity to build a major next-
generation communication company. We are delighted that you are considering
joining our talented and energetic team, and I am looking forward to working
with you.
Sincerely,
/s/ Catherine Hapka
- -----------------------------
Catherine Hapka
Chief Executive Officer
Accepted & Acknowledged
/s/ Dave Shimp 10-14-98
- ------------------------------ ------------------------
Dave Shimp Date
<PAGE>
EXHIBIT 10.38
Catherine Hapka
President & CEO
Tuesday, March 31, 1998
Scott Chandler
434 Hunter Ave.
State College, PA 16801
Subject: Offer of Employment with RHYTHMS NetConnections Inc.
Dear Scott:
It gives me great pleasure to offer you employment with RHYTHMS
NetConnections Inc. Inc. ("RHYTHMS" or the "Company'). This letter will serve to
outline the basic terms of your employment.
1. Start of Employment
The effective date of your employment will be April 8, 1998 ("Start Date").
2. Position
You will be Chief Financial Officer for the Company, You will report
directly to me.
3. Salary
Your annual base salary will be $180,000. You will be eligible for all
standard Company benefits.
4. Bonus
You will be eligible for an annual bonus of up to 40% of your base salary,
payable upon achievement of milestones to be established by me.
5. Stock
Subject to approval by the Board of Directors, you will be granted options
to purchase 160,000 shares of Common Stock at an exercise price per share
equal to the fair market
<PAGE>
Catherine Hapka
President & CEO
price of a share of the Company's common stock on the date the option is
granted. Twenty five percent (25%) of the options will vest on the first
anniversary of your Start Date, and the remaining seventy five percent
(75%) will vest thereafter on a monthly basis over the succeeding three (3)
year period, for a total vesting period of 4 years. The Company will also
reimburse you for up to $2,500 per year, for the interest carrying costs
associated with financing the purchase of up to 80,000 shares of Common
Stock.
6. Location
The Company headquarters are located in Englewood, Colorado. The Company
will reimburse you for up to $85,000 for your actual incurred and
reasonable expenses in relocating to Colorado, in accordance with the terms
and conditions as defined in Attachment A.
Employment with RHYTHMS will not be for a specified term and can be
terminated by you or by the Company at any time for any reason, with or without
cause, and with or without notice. Any contrary representations which may have
been made or which may be made to you are/will be superseded by this offer. The
"at will" nature of your employment described in this offer letter will
constitute the entire agreement between you and the Company concerning the
duration of your employment and the circumstances under which you or the Company
may terminate the employment relationship. Although your job duties, title,
compensation and benefits may change over time, the "at will" term of your
employment can only be changed in a writing which is signed by you and by the
President of the Company. If you accept this offer, the terms described in this
letter will be the terms of your employment. This offer is contingent on you
executing the RHYTHMS Proprietary Information and Inventions Agreement and
NonCompetition Agreement, copies of which are attached hereto and incorporated
by reference. The terms of this letter and your employment will be governed by
the laws of the State of Colorado.
In compliance with the Federal Immigration Reform Act, your employment
pursuant to this offer is contingent on your providing the legally required
proof of your identity and authorization to work in the United States.
Assuming this offer letter is acceptable to you, please sign a copy and
return it to me, along with signed copies of the Proprietary Information and
Inventions Agreement and NonCompetition Agreement.
<PAGE>
Catherine Hapka
President & CEO
Scott, we believe we have an excellent opportunity to build a major next-
generation communication company. We are delighted that you are considering
joining our talented and energetic team, and I am looking forward to working
with you.
Sincerely,
/s/ Catherine Hapka
- -----------------------------
Catherine Hapka
Accepted
/s/ Scott Chandler 4-1-98
- ------------------------------ ------------------------
Scott Chandler Date
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-3 (No. 333-87527) and on Forms S-8 (No. 333-94647, No.
333-76963, and No. 333-72995) of Rhythms NetConnections Inc. of our reports
dated February 29, 2000, except for Note 10, as to which the date is March 16,
2000 relating to the financial statements and financial statement schedule,
which appear in this Form 10-K.
PricewaterhouseCoopers LLP
Denver, Colorado
March 29, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 DEC-31-1999
<CASH> 21,315 84,954
<SECURITIES> 115,497 292,008
<RECEIVABLES> 247 4,383
<ALLOWANCES> 50 367
<INVENTORY> 340 4,071
<CURRENT-ASSETS> 139,758 400,337
<PP&E> 25,854 195,322
<DEPRECIATION> 540 13,070
<TOTAL-ASSETS> 171,726 685,424
<CURRENT-LIABILITIES> 13,789 63,178
<BONDS> 157,937 505,807
6,567 42
17 0
<COMMON> 8 78
<OTHER-SE> (6,772) 116,209
<TOTAL-LIABILITY-AND-EQUITY> 171,726 685,424
<SALES> 528 11,089
<TOTAL-REVENUES> 528 11,089
<CGS> 4,695 68,161
<TOTAL-COSTS> 28,929 200,254
<OTHER-EXPENSES> (5,846) (22,822)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 13,779 52,537
<INCOME-PRETAX> (36,334) (218,880)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (36,334) (218,880)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 36,334 218,880
<EPS-BASIC> (12.18) (4.15)
<EPS-DILUTED> (12.18) (4.15)
</TABLE>
