EXHIBIT 10.3
[FOCAL LOGO]
NON-QUALIFIED STOCK OPTION AGREEMENT
(INITIAL GRANT)
THIS AGREEMENT is made and entered into as of June 17, 2002 (the "AWARD
DATE"), by and between Focal Communications Corporation, a Delaware corporation
("WE" or the "COMPANY"), and Xxxxx Xxxxxx ("YOU" or the "OPTIONEE").
WHEREAS, Optionee is an employee of the Company;
WHEREAS, the Compensation Committee of the Board of Directors of the
Company (the "COMMITTEE"), which administers the Company's 1998 Equity and
Performance Incentive Plan (as this plan may be amended from time to time, the
"PLAN"), has approved the award to Optionee of a non-qualified stock option to
purchases shares of the common stock, $.01 par value per share, of the Company
(the "COMMON STOCK"), on the terms and conditions set forth herein; and
WHEREAS, the execution of this Agreement is contemplated by and is a
condition to the execution of that certain Executive Employment Agreement (the
"EMPLOYMENT AGREEMENT"), dated the date hereof, by and between the Company and
the Optionee.
NOW, THEREFORE, in consideration of the mutual promises made herein and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto, intending to be legally bound, agree as
follows:
1. AWARD CERTAIN TERMS AND CONDITIONS.
(a) GRANT OF STOCK OPTION. Subject to and upon the terms, conditions, and
restrictions set forth in this Agreement and in the Plan, the Company hereby
grants to Optionee, as of the Award Date, a stock option (the "OPTION") to
purchase 600,000 shares of Common Stock, subject to adjustment as hereinafter
provided (the "OPTION SHARES"). The Option may be exercised from time to time in
accordance with the terms of this Agreement. The price at which the Option
Shares may be purchased pursuant to this Option shall be $2.98 per share,
subject to adjustment as hereinafter provided (the "OPTION PRICE"). The Option
shall not be treated as an "incentive stock option" within the meaning of that
term under Section 422 of the Internal Revenue Code, or any successor provision
thereto.
(b) TERM OF OPTION. The term of the Option shall commence on the Award
Date and shall expire ten years from the Award Date, subject to Section 6.
(c) YOU ARE BOUND BY THE PLAN. A copy of the Plan is attached to this
Agreement as Exhibit A. By signing this Agreement, you certify that you have
completely and carefully reviewed this Agreement and the Plan. When you sign
this Agreement, you agree to be bound by all of the terms of the Plan and this
Agreement. Notwithstanding the foregoing, in the event of any inconsistency
between this Agreement and the Plan, this Agreement will govern.
(d) RETENTION OF COMPANY'S RIGHTS. By signing this Agreement, you agree
that nothing in this Agreement or in the fact that we have awarded you the
Option Shares (i) entitles you to remain employed by the Company for any period
of time or to continue to receive your present (or any other) rate of
compensation, (ii) affects our right to terminate your employment at any time
and for any reason, (iii) gives you the right to be selected at any time for
future awards of Option Shares, or (iv) provides for any adjustment to the
number of Option Shares upon the occurrence of any events, except as described
in Section 3.
2. VESTING OF OPTION SHARES.
(a) IMMEDIATELY VESTED OPTION SHARES. Subject to the expiration or
termination of the Option, the Option shall vest and become exercisable with
respect to one-sixth (1/6) of the Option Shares (the "IMMEDIATELY VESTED OPTION
SHARES") immediately upon execution of this Agreement by the Company and the
Optionee.
(b) PERFORMANCE VESTING OPTION SHARES. Subject to the expiration or
earlier termination of the Option, the Option shall vest and become exercisable
with respect to one-sixth (1/6) of the Option Shares (the "PERFORMANCE VESTING
OPTION SHARES") only upon the occurrence of one of the following events,:
(i) if, on any trading day, the Fair Market Value of the Common
Stock determined as of such day equals or exceeds the Effective Conversion
Price in effect on such day; or
(ii) the consummation of a Change of Control (as defined below) in
which the Fair Market Value of the consideration received by the holders of
Common Stock in exchange for each share of Common Stock in such Change of
Control equals or exceeds the Effective Conversion Price in effect
immediately prior to such Change of Control;
in each case provided that Optionee is then employed by the Company and shall
have been continuously employed by the Company from the Award Date through the
date of the occurrence of such event.
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(c) TIME VESTING OPTION SHARES. Subject to the expiration or earlier
termination of the Option, and except as otherwise provided in Sections 2(d) and
2(e), the Option shall vest and become exercisable with respect to two-thirds
(2/3) of the Option Shares (the "TIME VESTING OPTION SHARES"), such that the
following percentages (out of 100%) of the Time Vesting Option Shares shall be
vested on each of the following vesting dates, provided that Optionee is then
employed by the Company and shall have been continuously employed by the Company
from the Award Date through such dates:
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CUMULATIVE PERCENTAGE OF TIME VESTING
VESTING DATE OPTION SHARES VESTED ON SUCH VESTING DATE
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12-month anniversary of Award Date 25%
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15-month anniversary of Award Date 31.25%
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18-month anniversary of Award Date 37.5%
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21-month anniversary of Award Date 43.75%
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24-month anniversary of Award Date 50%
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27-month anniversary of Award Date 56.25%
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30-month anniversary of Award Date 62.5%
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33-month anniversary of Award Date 68.75%
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36-month anniversary of Award Date 75%
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39-month anniversary of Award Date 81.25%
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42-month anniversary of Award Date 87.5%
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45-month anniversary of Award Date 93.75%
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48-month anniversary of Award Date 100%
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Notwithstanding the foregoing sentence, and except as otherwise provided herein,
the above described vesting shall cease and no unvested Time Vesting Option
Shares shall vest after the date on which your employment with the Company
terminates for any reason.
(d) FULL ACCELERATION OF VESTING OF TIME VESTING OPTION SHARES UPON A
CHANGE IN CONTROL. Subject to the expiration or earlier termination of the
Option, all unvested Time Vesting Option Shares shall automatically vest upon
the
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consummation of a Change of Control, provided that Optionee is then employed by
the Company and shall have been continuously employed by the Company from the
Award Date through the date of consummation of such Change of Control.
(e) ONE-YEAR ACCELERATION OF VESTING OF TIME VESTING OPTION SHARES UPON
CERTAIN TERMINATION OF EMPLOYMENT. Subject to the expiration or earlier
termination of the Option, if Optionee's employment with the Company is
terminated due to Optionee's resignation for Good Reason (as defined in the
Employment Agreement) or a termination by the Company other than for Cause (as
defined in the Employment Agreement), then there shall vest upon such
termination the number of unvested Time Vesting Option Shares that were
scheduled to vest within the 12 months following the date of such termination
(and the remaining unvested Time Vesting Option Shares (if any) will continue to
vest on each vesting date in accordance with Section 2(c) above, such that the
time vesting schedule set forth in Section 2(c) will have been effectively
accelerated by one year).
3. ADJUSTMENTS.
(a) In the event of any stock dividend, stock split, or other division of
shares (however accomplished) of Common Stock, then in connection with such
event the number of Option Shares for which this Option is exercisable shall be
proportionately increased and the Option Price to be paid for each Option Share
upon exercise shall be proportionately decreased. In the event of any reverse
stock split or other combination of shares of Common Stock (however
accomplished), then in connection with such event the number of Option Shares
for which this Option is exercisable shall be proportionately decreased and the
Option Price to be paid for each Option Share upon exercise shall be
proportionately increased.
(b) In the event of any merger, consolidation, reorganization,
recapitalization, exchange of shares, change in corporate structure, or other
change in the shares of Common Stock, the Committee shall make such adjustments
in the number and type of Option Shares specified herein as it determines to be
appropriate and equitable (and such adjustment will in no event be considered an
amendment or modification of the Plan or of this Agreement). The issuance by the
Company of shares of stock of any class, or options or securities exercisable or
convertible into shares of stock of any class, for cash or property, or for
labor or services either upon direct sale, or upon the exercise of rights or
warrants to subscribe therefor, or upon exercise or conversion of other
securities, will not affect, and no adjustment by reason thereof will be made
with respect to, the Option Shares.
(c) Without limiting the foregoing, in the event of any merger,
consolidation, or other reorganization in which the Company is not the surviving
or continuing corporation or in which a Change in Control is to occur, the
Company's obligations regarding Option Shares granted hereunder and that are
outstanding on the date of such event will, on such terms as may be determined
by the Committee in its discretion prior to such event to be appropriate and
equitable, be assumed by the surviving or continuing corporation or canceled in
exchange for property (which
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may include cash and/or equity or securities convertible into equity of the
surviving or continuing corporation).
4. TRANSFERABILITY OF OPTION. The Option granted hereby shall be neither
transferable nor assignable by Optionee other than by will or by the laws of
descent and distribution and may be exercised, during the lifetime of Optionee,
only by Optionee or, in the event of his or her legal incapacity, by his or her
guardian or legal representative acting on behalf of Optionee. Any purported
transfer or encumbrance in violation of the provisions of this Section 4 shall
be void, and the other party to any such purported transaction shall not obtain
any rights to or interest in the Option.
5. NOTICE OF EXERCISE; PAYMENT. Options may be exercised only to the
extent they have become vested in accordance with the terms hereof and have not
expired or been terminated pursuant to the terms hereof. To the extent then
exercisable, the Option may be exercised by written notice to the Company
stating the number of Option Shares for which the Option is being exercised and
the intended manner of payment. The date of such notice shall be the exercise
date. Payment equal to the aggregate Option Price of the Option Shares being
exercised shall be tendered in full with the notice of exercise to the Company
either (i) in cash or by check acceptable to the Company, (ii) by the tender to
the Company of shares of Common Stock owned by Optionee for at least six months
and registered in the name of Optionee having an aggregate fair market value on
the date of exercise equal to the total Option Price, such fair market value to
be determined based on the market value per Share on the date of exercise, (iii)
by delivery of irrevocable instructions to a financial institution or broker to
deliver promptly to the Company sale or loan proceeds with respect to the shares
sufficient to pay the total Option Price, or (iv) by any combination of the
payment methods specified in clauses (i) through (iii) hereof. Within ten days
thereafter, the Company shall direct the due issuance of the Option Shares so
purchased.
6. CONDITIONS AND LIMITATIONS ON RIGHT TO EXERCISE OPTION.
Notwithstanding the provisions of Sections 1(b) and 2:
(a) Except as otherwise provided in Section 6(b), the Option may not be
exercised unless Optionee is, at the time of exercise, an employee of the
Company and has been employed by the Company continuously since the Award Date.
If Optionee returns to active employment with the Company after having been on
an approved leave of absence from the Company, Optionee shall be treated as if
continuously employed during the period of such leave of absence. The Option may
not, however, be exercised by Optionee while on a leave of absence from active
employment with the Company, unless such exercise is expressly approved in
writing by the Committee.
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(b) (i) If Optionee ceases to be employed by the Company (other than by
reason of death, Disability), the Option, to the extent Optionee was entitled to
exercise it at the date of termination of employment, may be exercised at any
time within 30 days (or, if Optionee's employment is terminated by reason of
death or Disability, within 12 months) after such termination but not after the
date of termination of the Option. Any part of the Option not so exercised shall
expire. Notwithstanding the foregoing, if Optionee's employment is terminated
for Cause (as defined in Section 7), then the Option shall immediately terminate
and be unexercisable.
7. DEFINITIONS.
"CAUSE" has the meaning assigned to such term in the Employment Agreement.
"CHANGE IN CONTROL" means the occurrence of one of the following events:
(a) a merger, consolidation, or other business combination of the Company
with or into another corporation or other legal person, as a result of which
transaction the holders of Company Voting Securities immediately prior to such
transaction do not, immediately after such transaction, hold a majority of the
Voting Securities of the combined or surviving entity (excluding for purposes of
such determination (i) any Voting Securities of the combined or surviving entity
that are received by holders of Company Voting Securities in such transaction in
respect of securities of the entity with or into which the Company is merged or
combined that were held immediately prior to such transaction by holders of
Company Voting Securities, and (ii) if the Company is not the combined or
surviving entity, any Voting Securities of the combined or surviving entity that
are held immediately prior to such transaction by holders of Company Voting
Securities);
(b) a reorganization, tender offer, or other acquisition of the Company by
another corporation or other legal person, as a result of which transaction the
holders of Company Voting Securities immediately prior to such transaction do
not hold a majority of the Company Voting Securities immediately after such
transaction (excluding for purposes of such determination any Voting Securities
of the acquiring corporation or other legal person that are held immediately
prior to such transaction by holders of Company Voting Securities); or
(c) the Company sells or otherwise transfers all or substantially all of
its assets to any other corporation or other legal person (other than a direct
or indirect subsidiary of the Company).
"CODE" means the Internal Revenue Code of 1986, as amended, and any
successor statute.
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"COMMON STOCK" means the Common Stock, par value $.01 per share, of the
Company, and any other shares into which such stock may be changed by reason of
a recapitalization, reorganization, merger, consolidation, or any other change
in the corporate structure or capital stock of the Company.
"COMPANY" means
Focal Communications Corporation, a
Delaware corporation,
and (except to the extent the context requires otherwise) any "subsidiary
corporation" of
Focal Communications Corporation, as such term is defined in
Section 424(f) of the Code.
"DISABILITY" has the meaning assigned to such term in the Employment
Agreement.
"EFFECTIVE CONVERSION PRICE" means, on any date, the product of (x) the
price per share of Common Stock at which the Company's Series A Preferred Stock
converts into shares of Common Stock pursuant to the terms of the Company's
certificate of incorporation in effect on such date, TIMES (y) a fraction, the
numerator of which is the "Liquidation Value" of a share of Series A Preferred
Stock at its issuance pursuant to the terms of the Company's certificate of
incorporation in effect on such date, and the denominator of which is the
"Liquidation Value" of a share of Series A Preferred Stock (together with the
amount of all unpaid "Accumulated Dividends" on such share as of such date)
determined pursuant to the terms of the Company's certificate of incorporation
in effect on such date; IT BEING UNDERSTOOD that any determination of "Effective
Conversion Price" in connection with a Change of Control will be made after
giving effect to any acceleration of dividends on the Series A Preferred Stock
under the terms of the Company's certificate of incorporation as a result of
such Change of Control.
"FAIR MARKET VALUE" (i) with respect to cash, the aggregate amount of such
cash; (ii) with respect to any security that is publicly traded, the average,
over the 30 consecutive trading days immediately prior to the date of
determination, of the closing price for such day of such security on the
principal securities exchange on which such security is listed, or if on any day
such security is not so listed, the average of the representative bid and asked
prices on such day quoted in the Nasdaq System as of 4:00 p.m. New York time, or
if on any day such security is not quoted in the Nasdaq System, the average of
the highest bid and lowest asked prices on such day in the domestic
over-the-counter market as reported by the National Quotation Bureau
Incorporated, or any similar successor organization; or (iii) with respect to
any security that is not publicly traded or any other asset, the fair market
value of such security asset as determined in good faith by the Committee.
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"GOOD REASON" has the meaning assigned to such term in the Employment
Agreement.
"VOTING SECURITIES" of any entity means (i) if such entity is a
corporation, securities of such entity entitled to vote generally in the
election of directors, or (ii) if such entity is not a corporation, securities
entitled to vote generally in the election of a board of managers or comparable
governing body (or, if there is no such governing body, securities entitled to
vote to direct the management, policies and affairs of such entity.
8. TAXES AND WITHHOLDING. If the Company shall be required to withhold
any federal, state, local or foreign tax in connection with the exercise of the
Option, and the amounts available to the Company for such withholding are
insufficient, Optionee shall pay the tax or make provisions that are
satisfactory to the Company for the payment thereof. Optionee may elect to
satisfy all or any part of any such withholding obligation by surrendering to
the Company a portion of the Option Shares that are issued or transferred to
Optionee upon the exercise of the Option, and the Option Shares so surrendered
by Optionee shall be credited against any such withholding obligation at the
market value per Share of such shares on the date of such surrender.
9. COMPLIANCE WITH LAW. The Company shall make reasonable efforts to
comply with all applicable federal and state securities laws; PROVIDED, HOWEVER,
notwithstanding any other provision of this Agreement, the Option shall not be
exercisable if the exercise thereof would result in a violation of any such law.
10. MISCELLANEOUS PROVISIONS.
(a) MANDATORY ARBITRATION. Subject to Section 10(f), all claims, disputes,
controversies or other matters in question arising under or relating to this
Agreement (collectively, "DISPUTES") will, if unable to be resolved within 10
days of preliminary negotiation between you and the Company, be resolved through
binding arbitration in accordance with the commercial arbitration rules and
practices of the American Arbitration Association. Such arbitration will be in
New York, New York, or such other place as is mutually agreeable to you and the
Company. The cost of each arbitration proceeding, including without limitation
the arbitrator's compensation and expenses, hearing room charges, court reporter
transcript charges, reasonable attorney fees and expenses, etc., will be
allocated among the parties by the arbitrator based upon the relative merits of
the positions taken by the parties to such Dispute. The parties hereto agree
that, subject to Section 10(f), mandatory arbitration under this Section 10(a)
will be the sole and exclusive remedy for resolving and remedying all Disputes
hereunder.
(b) SEVERABILITY. Whenever possible, each provision of this Agreement will
be interpreted in such manner as to be effective and valid under applicable law,
but if
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any provision of this Agreement is held to be invalid, illegal or unenforceable
in any respect under any applicable law or rule in any jurisdiction, such
invalidity, illegality or unenforceability will not affect any other provision
or any other jurisdiction, but this Agreement will be reformed, construed and
enforced in such jurisdiction as if such invalid, illegal or unenforceable
provision had never been contained herein.
(c) COMPLETE AGREEMENT. This Agreement embodies the complete agreement and
understanding between you and the Company concerning the grant of the Option and
supersedes and preempts any prior understandings or agreements, written or oral,
that address the grant of the Option to you.
(d) COUNTERPARTS. This Agreement may be executed in separate counterparts.
(e) SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, this
Agreement will bind the parties hereto and their respective successors and
assigns and will inure to the benefit of and be enforceable by the parties
hereto and their respective successors and assigns whether so expressed or not.
(f) CHOICE OF LAW. All questions concerning the construction, validity,
enforcement and interpretation of this Agreement and the exhibits hereto will be
governed by the internal law, and not the law of conflicts, of the State of
Delaware.
(g) EQUITABLE REMEDIES. You and we agree and acknowledge that money
damages would not be an adequate remedy if you or any other holder of Option
Shares were to breach any of the provisions of Section 4, and that the Company
(or any third-party beneficiary hereof) may obtain specific performance and/or
other injunctive relief (without posting any bond or deposit) in order to
enforce or prevent any violations of the provisions of Section 4 of this
Agreement.
(h) AMENDMENT, MODIFICATION, OR WAIVER. The provisions of this Agreement
may be amended, modified, or waived only with the prior written consent of the
Company and you.
(i) NOTICES. All notices, demands or other communications to be given or
delivered under or by reason of the provisions of this Agreement will be in
writing and will be deemed to have been given when (i) delivered personally to
the recipient, (ii) if faxed to the recipient (with hard copy sent to the
recipient by reputable overnight courier service (charges prepaid) that same
day) if faxed before 5:00 p.m. Chicago time on a business day, and otherwise on
the next business day, or (iii) one business day after being sent to the
recipient by reputable overnight courier service (charges prepaid). Such
notices, demands and other communications will be sent to the following persons
at the following addresses:
TO THE COMPANY:
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Focal Communications Corporation
000 Xxxxx XxXxxxx Xxxxxx
Xxxxx 0000
Xxxxxxx, Xxxxxxxx 00000
Attention: General Counsel
Telephone: 000-000-0000
Fax: 000-000-0000
TO YOU: at the address listed in the Company's records,
or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party.
(j) NO RIGHTS AS STOCKHOLDER. You shall have none of the rights of a
stockholder with respect to the shares of Common Stock subject to the Option
until such shares are issued to you upon exercise of the Option.
(k) AVAILABLE SHARES. Subject to Section 2(d), the Company shall at all
times until the expiration of the Option reserve and keep available, either in
its treasury or out of its authorized but unissued shares of Common Stock, the
full number of Option Shares deliverable upon the exercise of the Option.
(l) RELATION TO OTHER BENEFITS. Any economic or other benefit to Optionee
under this Agreement shall not be taken into account in determining any benefits
to which Optionee may be entitled under any profit-sharing, retirement, or other
benefit or compensation plan maintained by the Company and shall not affect the
amount of any life insurance coverage available to any beneficiary under any
life insurance plan covering employees of the Company.
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(m) DESCRIPTIVE HEADINGS. The descriptive headings of this Agreement are
inserted for convenience only and do not constitute a substantive part of this
Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
date first written above.
FOCAL COMMUNICATIONS CORPORATION
By:
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Name:
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Title:
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OPTIONEE
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Xxxxx Xxxxxx
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