EXHIBIT 10.16
IMMEDIATELY EXERCISABLE
RHYTHMS NETCONNECTIONS INC.
STOCK PURCHASE AGREEMENT
AGREEMENT made as of this _____ day of ____________, 19___, by and
among Rhythms NetConnections Inc., (the "Corporation"), ____________________,
the holder of a stock option (the "Optionee") under the Corporation's 1997
Stock Option/Stock Issuance Plan and ________________________, the Optionee's
spouse.
I. EXERCISE OF OPTION
1.1 EXERCISE. Optionee hereby purchases ____________ shares
("Purchased Shares") of the Corporation's common stock ("Common Stock")
pursuant to that certain option ("Option") granted Optionee on _____________,
19___ ("Grant Date") to purchase up to ____________ shares of the Common
Stock ("Total Purchasable Shares") under the Corporation's 1997 Stock
Option/Stock Issuance Plan (the "Plan") at an option price of $__________ per
share ("Option Price").
1.2 PAYMENT. Concurrently with the delivery of this Agreement to
the Corporate Secretary of the Corporation, Optionee shall pay the Option
Price for the Purchased Shares in accordance with the provisions of the
agreement between the Corporation and Optionee evidencing the Option (the
"Option Agreement") and shall deliver whatever additional documents may be
required by the Option Agreement as a condition for exercise, together with a
duly-executed blank Assignment Separate from Certificate (in the form
attached hereto as Exhibit I) with respect to the Purchased Shares.
1.3 DELIVERY OF CERTIFICATES. The certificates representing the
Purchased Shares hereunder shall be held in escrow by the Corporate Secretary
of the Corporation in accordance with the provisions of Article VII.
1.4 SHAREHOLDER RIGHTS. Until such time as the Corporation
actually exercises its repurchase right, rights of first refusal or special
purchase right under this Agreement, Optionee (or any successor in interest)
shall have all the rights of a shareholder (including voting and dividend
rights) with respect to the Purchased Shares, including the Purchased Shares
held in escrow under Article VII, subject, however, to the transfer
restrictions of Article IV.
II. SECURITIES LAW COMPLIANCE
2.1 EXEMPTION FROM REGISTRATION. The Purchased Shares have not
been registered under the Securities Act of 1933, as amended (the "1933
Act"), and are accordingly being issued to Optionee in reliance upon the
exemption from such registration provided by Rule 701 of the Securities and
Exchange Commission for stock issuances under compensatory benefit plans such
as the Plan. Optionee hereby acknowledges previous receipt of a copy of the
documentation for such Plan in the form of Exhibit C to the Notice of Grant
of Stock Option (the "Grant Notice") accompanying the Option Agreement.
2.2 RESTRICTED SECURITIES.
A. Optionee hereby confirms that Optionee has been informed
that the Purchased Shares are restricted securities under the 1933 Act and
may not be resold or transferred unless the Purchased Shares are first
registered under the Federal securities laws or unless an exemption from such
registration is available. Accordingly, Optionee hereby acknowledges that
Optionee is prepared to hold the Purchased Shares for an indefinite period
and that Optionee is aware that Rule 144 of the Securities and Exchange
Commission issued under the 1933 Act is not presently available to exempt the
sale of the Purchased Shares from the registration requirements of the 1933
Act.
B. Upon the expiration of the ninety (90)-day period
immediately following the date on which the Corporation first becomes subject
to the reporting requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), the Purchased Shares, to the extent vested
under Article V, may be sold (without registration) pursuant to the
applicable requirements of Rule 144. If Optionee is at the time of such sale
an affiliate of the Corporation for purposes of Rule 144 or was such an
affiliate during the preceding three (3) months, then the sale must comply
with all the requirements of Rule 144 (including the volume limitation on the
number of shares sold, the broker/market-maker sale requirement and the
requisite notice to the Securities and Exchange Commission); however, the two
(2)-year holding period requirement of the Rule will not be applicable. If
Optionee is not at the time of the sale an affiliate of the Corporation nor
was such an affiliate during the preceding three (3) months, then none of the
requirements of Rule 144 (other than the broker/market-maker sale requirement
for Purchased Shares held for less than three (3) years following payment in
cash of the Option Price therefor) will be applicable to the sale.
C. Should the Corporation not become subject to the
reporting requirements of the Exchange Act, then Optionee may, provided
he/she is not at the time an affiliate of the Corporation (nor was such an
affiliate during the preceding three (3) months), sell the Purchased Shares
(without registration) pursuant to paragraph (k) of Rule 144 after the
Purchased Shares have been held for a period of three (3) years following the
payment in cash of the Option Price for such shares.
2.3 DISPOSITION OF SHARES. Optionee hereby agrees that Optionee
shall make no disposition of the Purchased Shares (other than a permitted
transfer under paragraph 4.1) unless and until there is compliance with all
of the following requirements:
(a) Optionee shall have notified the Corporation of the
proposed disposition and provided a written summary of the terms and
conditions of the proposed disposition.
(b) Optionee shall have complied with all requirements of this
Agreement applicable to the disposition of the Purchased Shares.
(c) Optionee shall have provided the Corporation with written
assurances, in form and substance satisfactory to the Corporation, that
(i) the proposed disposition does not require registration of the
Purchased Shares under the 1933 Act or
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(ii) all appropriate action necessary for compliance with the registration
requirements of the 1933 Act or of any exemption from registration
available under the 1933 Act (including Rule 144) has been taken.
(d) Optionee shall have provided the Corporation with written
assurances, in form and substance satisfactory to the Corporation, that
the proposed disposition will not result in the contravention of any
transfer restrictions applicable to the Purchased Shares pursuant to the
provisions of the Commissioner Rules identified in paragraph 2.5.
The Corporation shall NOT be required (i) to transfer on its books
any Purchased Shares which have been sold or transferred in violation of the
provisions of this Article II NOR (ii) to treat as the owner of the Purchased
Shares, or otherwise to accord voting or dividend rights to, any transferee
to whom the Purchased Shares have been transferred in contravention of this
Agreement.
2.4 RESTRICTIVE LEGENDS. In order to reflect the restrictions on
disposition of the Purchased Shares, the stock certificates for the Purchased
Shares will be endorsed with restrictive legends, including one or more of
the following legends:
(i) "The shares represented by this certificate have not
been registered under the Securities Act of 1933. The shares may not be sold
or offered for sale in the absence of (a) an effective registration statement
for the shares under such Act, (b) a "no action" letter of the Securities and
Exchange Commission with respect to such sale or offer, or (c) satisfactory
assurances to the Corporation that registration under such Act is not
required with respect to such sale or offer."
(ii) "The shares represented by this certificate are
unvested and accordingly may not be sold, assigned, transferred, encumbered,
or in any manner disposed of except in conformity with the terms of a written
agreement dated ____________, 19 between the Corporation and the
registered holder of the shares (or the predecessor in interest to the
shares). Such agreement grants certain repurchase rights and rights of first
refusal to the Corporation (or its assignees) upon the sale, assignment,
transfer, encumbrance or other disposition of the Corporation's shares or
upon termination of service with the Corporation. The Corporation will upon
written request furnish a copy of such agreement to the holder hereof without
charge."
III. SPECIAL TAX ELECTION
3.1 SECTION 83(b) ELECTION APPLICABLE TO THE EXERCISE OF A
NON-STATUTORY STOCK OPTION. If the Purchased Shares are acquired hereunder
pursuant to the exercise of a NON-STATUTORY STOCK OPTION, as specified in the
Grant Notice, then the Optionee understands that under Section 83 of the
Internal Revenue Code of 1986, as amended (the "Code"), the excess of the
fair market value of the Purchased Shares on the date any forfeiture
restrictions applicable to such shares lapse over the Option Price paid for
such shares will be reportable as ordinary income on such lapse date. For
this purpose, the term "forfeiture restrictions" includes the right of the
Corporation to repurchase the Purchased Shares pursuant to the Repurchase
Right provided
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under Article V of this Agreement. Optionee understands that he/she may
elect under Section 83(b) of the Code to be taxed at the time the Purchased
Shares are acquired hereunder, rather than when and as such Purchased Shares
cease to be subject to such forfeiture restrictions. Such election must be
filed with the Internal Revenue Service within thirty (30) days after the
date of this Agreement. Even if the fair market value of the Purchased
Shares at the date of this Agreement equals the Option Price paid (and thus
no tax is payable), the election must be made to avoid adverse tax
consequences in the future. THE FORM FOR MAKING THIS ELECTION IS ATTACHED AS
EXHIBIT II HERETO. OPTIONEE UNDERSTANDS THAT FAILURE TO MAKE THIS FILING
WITHIN THE THIRTY (30)-DAY PERIOD WILL RESULT IN THE RECOGNITION OF ORDINARY
INCOME BY THE OPTIONEE AS THE FORFEITURE RESTRICTIONS LAPSE.
3.2 CONDITIONAL SECTION 83(b) ELECTION APPLICABLE TO THE EXERCISE
OF AN INCENTIVE STOCK OPTION. If the Purchased Shares are acquired hereunder
pursuant to the exercise of an INCENTIVE STOCK OPTION under the Federal tax
laws, as specified in the Grant Notice, then the following tax principles
shall be applicable to the Purchased Shares:
A. For regular tax purposes, no taxable income will be
recognized at the time the Option is exercised.
B. The excess of (i) the fair market value of the Purchased
Shares on the date the Option is exercised or (if later) on the date any
forfeiture restrictions applicable to the Purchased Shares lapse over (ii)
the Option Price paid for the Purchased Shares will be includible in the
Optionee's taxable income for alternative minimum tax purposes.
C. If the Optionee makes a disqualifying disposition of the
Purchased Shares, then the Optionee will recognize ordinary income in the
year of such disposition equal in amount to the excess of (i) the fair market
value of the Purchased Shares on the date the Option is exercised or (if
later) on the date any forfeiture restrictions applicable to the Purchased
Shares lapse over (ii) the Option Price paid for the Purchased Shares. Any
additional gain recognized upon the disqualifying disposition will be either
short-term or long-term capital gain depending upon the period for which the
Purchased Shares are held prior to the disposition.
D. For purposes of the foregoing, the term "forfeiture
restrictions" will include the right of the Corporation to repurchase the
Purchased Shares pursuant to the Repurchase Right provided under Article V of
this Agreement. The term "disqualifying disposition" means any sale or other
disposition of the Purchased Shares within two (2) years after the Grant Date
or within one (1) year after the execution date of this Agreement.
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1 Generally, a disposition of shares purchased under an incentive stock
option includes any transfer of legal title, including a transfer by sale,
exchange or gift, but does not include a transfer to the Optionee's spouse, a
transfer into joint ownership with right of survivorship if Optionee remains
one of the joint owners, a pledge, a transfer by bequest or inheritance or
certain tax free exchanges permitted under the Code.
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E. In the absence of final Treasury Regulations relating to
incentive stock options, it is not certain whether the Optionee may, in
connection with the exercise of the Option for any Purchased Shares at the
time subject to forfeiture restrictions, file a protective election under
Section 83(b) of the Code which would limit (I) the Optionee's alternative
minimum taxable income upon exercise and (II) the Optionee's ordinary income
upon a disqualifying disposition, to the excess of (i) the fair market value
of the Purchased Shares on the date the Option is exercised over (ii) the
Option Price paid for the Purchased Shares. THE APPROPRIATE FORM FOR MAKING
SUCH A PROTECTIVE ELECTION IS ATTACHED AS EXHIBIT II TO THIS AGREEMENT AND
MUST BE FILED WITH THE INTERNAL REVENUE SERVICE WITHIN THIRTY (30) DAYS AFTER
THE DATE OF THIS AGREEMENT. HOWEVER, SUCH ELECTION IF PROPERLY FILED WILL
ONLY BE ALLOWED TO THE EXTENT THE FINAL TREASURY REGULATIONS PERMIT SUCH A
PROTECTIVE ELECTION.
3.3 OPTIONEE ACKNOWLEDGES THAT IT IS OPTIONEE'S SOLE
RESPONSIBILITY, AND NOT THE CORPORATION'S, TO FILE A TIMELY ELECTION UNDER
SECTION 83(b), EVEN IF OPTIONEE REQUESTS THE CORPORATION OR ITS
REPRESENTATIVES TO MAKE THIS FILING ON HIS/HER BEHALF. This filing should be
made by registered or certified mail, return receipt requested, and Optionee
must retain two (2) copies of the completed form for filing with his or her
State and Federal tax returns for the current tax year and an additional copy
for his or her records.
IV. TRANSFER RESTRICTIONS
4.1 RESTRICTION ON TRANSFER. Optionee shall not transfer, assign,
encumber or otherwise dispose of any of the Purchased Shares which are
subject to the Corporation's Repurchase Right under Article V. In addition,
Purchased Shares which are released from the Repurchase Right shall not be
transferred, assigned, encumbered or otherwise made the subject of
disposition in contravention of the Corporation's First Refusal Right under
Article VI. Such restrictions on transfer, however, shall NOT be applicable
to (i) a gratuitous transfer of the Purchased Shares made to the Optionee's
spouse or issue, including adopted children, or to a trust for the exclusive
benefit of the Optionee or the Optionee's spouse or issue, PROVIDED AND ONLY
IF the Optionee obtains the Corporation's prior written consent to such
transfer, (ii) a transfer of title to the Purchased Shares effected pursuant
to the Optionee's will or the laws of intestate succession or (iii) a
transfer to the Corporation in pledge as security for any purchase-money
indebtedness incurred by the Optionee in connection with the acquisition of
the Purchased Shares.
4.2 TRANSFEREE OBLIGATIONS. Each person (other than the
Corporation) to whom the Purchased Shares are transferred by means of one of
the permitted transfers specified in paragraph 4.1 must, as a condition
precedent to the validity of such transfer, acknowledge in writing to the
Corporation that such person is bound by the provisions of this Agreement and
that the transferred shares are subject to (i) both the Corporation's
Repurchase Right and the Corporation's First Refusal Right granted hereunder
and (ii) the market stand-off provisions of paragraph 4.4, to the same extent
such shares would be so subject if retained by the Optionee.
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4.3 DEFINITION OF OWNER. For purposes of Articles IV, V, VI and
VII and Section 9.4 of this Agreement, the term "Owner" shall include the
Optionee and all subsequent holders of the Purchased Shares who derive their
chain of ownership through a permitted transfer from the Optionee in
accordance with paragraph 4.1.
4.4 MARKET STAND-OFF PROVISIONS.
A. In connection with any underwritten public offering by
the Corporation of its equity securities pursuant to an effective
registration statement filed under the 1933 Act, including the Corporation's
initial public offering, Owner shall not sell, make any short sale of, loan,
hypothecate, pledge, grant any option for the purchase of, or otherwise
dispose or transfer for value or otherwise agree to engage in any of the
foregoing transactions with respect to, any Purchased Shares without the
prior written consent of the Corporation or its underwriters. Such
limitations shall be in effect for such period of time from and after the
effective date of such registration statement as may be requested by the
Corporation or such underwriters; PROVIDED, however, that in no event shall
such period exceed one hundred-eighty (180) days. The limitations of this
paragraph 4.4 shall remain in effect for the two-year period immediately
following the effective date of the Corporation's initial public offering and
shall thereafter terminate and cease to have any force or effect.
B. Owner shall be subject to the market stand-off provisions
of this paragraph 4.4 PROVIDED AND ONLY IF the officers and directors of the
Corporation are also subject to similar arrangements.
C. In the event of any stock dividend, stock split,
recapitalization or other change affecting the Corporation's outstanding
Common Stock effected as a class without receipt of consideration, then any
new, substituted or additional securities distributed with respect to the
Purchased Shares shall be immediately subject to the provisions of this
paragraph 4.4, to the same extent the Purchased Shares are at such time
covered by such provisions.
D. In order to enforce the limitations of this paragraph
4.4, the Corporation may impose stop-transfer instructions with respect to
the Purchased Shares until the end of the applicable stand-off period.
V. REPURCHASE RIGHT
5.1 GRANT. The Corporation is hereby granted the right (the
"Repurchase Right"), exercisable at any time during the sixty (60)-day period
following the date the Optionee ceases for any reason to remain in Service or
(if later) during the sixty (60)-day period following the execution date of
this Agreement, to repurchase at the Option Price all or (at the discretion
of the Corporation and with the consent of the Optionee) any portion of the
Purchased Shares in which the Optionee has not acquired a vested interest in
accordance with the vesting provisions of paragraph 5.3 (such shares to be
hereinafter called the "Unvested Shares"). For purposes of this Agreement,
the Optionee shall be deemed to remain in Service for so long as the Optionee
continues to render periodic services to the Corporation or any parent or
subsidiary corporation, whether as an employee, a non-employee member of the
board of directors, or an independent contractor or consultant.
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5.2 EXERCISE OF THE REPURCHASE RIGHT. The Repurchase Right shall
be exercisable by written notice delivered to the Owner of the Unvested
Shares prior to the expiration of the applicable sixty (60)-day period
specified in paragraph 5.1. The notice shall indicate the number of Unvested
Shares to be repurchased and the date on which the repurchase is to be
effected, such date to be not more than thirty (30) days after the date of
notice. To the extent one or more certificates representing Unvested Shares
may have been previously delivered out of escrow to the Owner, then Owner
shall, prior to the close of business on the date specified for the
repurchase, deliver to the Secretary of the Corporation the certificates
representing the Unvested Shares to be repurchased, each certificate to be
properly endorsed for transfer. The Corporation shall, concurrently with the
receipt of such stock certificates (either from escrow in accordance with
paragraph 7.3 or from Owner as herein provided), pay to Owner in cash or cash
equivalents (including the cancellation of any purchase-money indebtedness),
an amount equal to the Option Price previously paid for the Unvested Shares
which are to be repurchased.
5.3 TERMINATION OF THE REPURCHASE RIGHT. The Repurchase Right
shall terminate with respect to any Unvested Shares for which it is not
timely exercised under paragraph 5.2. In addition, the Repurchase Right
shall terminate, and cease to be exercisable, with respect to any and all
Purchased Shares in which the Optionee vests in accordance with the vesting
schedule specified in the Grant Notice. All Purchased Shares as to which the
Repurchase Right lapses shall, however, continue to be subject to (i) the
First Refusal Right of the Corporation and its assignees under Article VI,
(ii) the market stand-off provisions of paragraph 4.4 and (iii) the Special
Purchase Right under Article VIII.
5.4 AGGREGATE VESTING LIMITATION. If the Option is exercised in
more than one increment so that the Optionee is a party to one or more other
Stock Purchase Agreements ("Prior Purchase Agreements") which are executed
prior to the date of this Agreement, then the total number of Purchased
Shares as to which the Optionee shall be deemed to have a fully-vested
interest under this Agreement and all Prior Purchase Agreements shall not
exceed in the aggregate the number of Purchased Shares in which the Optionee
would otherwise at the time be vested, in accordance with the vesting
provisions of paragraph 5.3, had all the Purchased Shares been acquired
exclusively under this Agreement.
5.5 FRACTIONAL SHARES. No fractional shares shall be repurchased
by the Corporation. Accordingly, should the Repurchase Right extend to a
fractional share (in accordance with the vesting provisions of paragraph 5.3)
at the time the Optionee ceases Service, then such fractional share shall be
added to any fractional share in which the Optionee is at such time vested in
order to make one whole vested share no longer subject to the Repurchase
Right.
5.6 ADDITIONAL SHARES OR SUBSTITUTED SECURITIES. In the event of
any stock dividend, stock split, recapitalization or other change affecting
the Corporation's outstanding Common Stock as a class effected without
receipt of consideration, then any new, substituted or additional securities
or other property (including money paid other than as a regular cash
dividend) which is by reason of any such transaction distributed with respect
to the Purchased Shares shall be immediately subject to the Repurchase Right,
but only to the extent the Purchased Shares are at the time covered by such
right. Appropriate adjustments to reflect the distribution of such
securities or property shall be made to the number of Purchased Shares and
Total Purchasable Shares hereunder and to the price per share to be paid upon
the exercise of the
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Repurchase Right in order to reflect the effect of any such transaction upon
the Corporation's capital structure; PROVIDED, however, that the aggregate
purchase price shall remain the same.
5.7 CORPORATE TRANSACTION.
A. The Repurchase Rights shall automatically terminate and
cease to be exercisable with respect to a portion of the Purchased Shares
upon the consummation of any Corporate Transaction, provided that such
repurchase right shall not terminate if and to the extent the repurchase
rights are assigned to the successor corporation (or parent thereof) in
connection with such Corporate Transaction. The portion of the Purchased
Shares with respect to which the repurchase rights will terminate shall be a
number of Purchased Shares equal to the total number of Unvested Shares
immediately prior to the Corporate Transaction multiplied by a fraction, the
NUMERATOR of which is the number of complete months which elapsed after the
Vesting Commencement Date set forth in the Grant Notice and the date of the
Corporate Transaction, and the DENOMINATOR of which is the number of months
required under the Grant Notice for all of the Purchased Shares to become
fully vested. Any and all repurchase rights which will not be either
assigned or terminated at the time of the Corporate Transaction may be
exercised by the Company immediately prior to the Corporate Transaction.
B. Repurchase rights which are assigned in connection with a
Corporate Transaction shall be exercisable with respect to the property
issued to the Optionee upon consummation of such Corporate Transaction in
exchange for the Common Stock held by the Optionee subject to the repurchase
rights immediately prior to the Corporate Transaction.
C. Any Repurchase Rights which are assigned in a Corporate
Transaction and do not otherwise become vested at that time, shall
automatically terminate and cease to be exercisable in the event the
Optionee's Service should subsequently terminate by reason of an Involuntary
Termination within twenty-four (24) months following the effective date of
such Corporate Transaction.
D. This Agreement shall not in any way affect the right of
the Corporation to adjust, reclassify, reorganize or otherwise make changes
in its capital or business structure or to merge, consolidate, dissolve,
liquidate or sell or transfer all or any part of its business or assets.
VI. RIGHT OF FIRST REFUSAL
6.1 GRANT. The Corporation is hereby granted rights of first
refusal (the "First Refusal Right"), exercisable in connection with any
proposed transfer of the Purchased Shares in which the Optionee has vested in
accordance with the vesting provisions of Article V. For purposes of this
Article VI, the term "transfer" shall include any sale, assignment, pledge,
encumbrance or other disposition for value of the Purchased Shares intended
to be made by the Owner, but shall not include any of the permitted transfers
under paragraph 4.1.
6.2 NOTICE OF INTENDED DISPOSITION. In the event the Owner
desires to accept a bona fide third-party offer for the transfer of any or
all of the Purchased Shares (the shares subject to such offer to be
hereinafter called the "Target Shares"), Owner shall promptly (i)
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deliver to the Corporate Secretary of the Corporation written notice (the
"Disposition Notice") of the terms and conditions of the offer, including the
purchase price and the identity of the third-party offeror, and (ii) provide
satisfactory proof that the disposition of the Target Shares to such
third-party offeror would not be in contravention of the provisions set forth
in Articles II and IV of this Agreement.
6.3 EXERCISE OF RIGHT. The Corporation shall, for a period of
forty-five (45) days following receipt of the Disposition Notice, have the
right to repurchase any or all of the Target Shares specified in the
Disposition Notice upon the same terms and conditions specified therein or
upon terms and conditions which do not materially vary from those specified
therein. Such right shall be exercisable by delivery of written notice (the
"Exercise Notice") to Owner prior to the expiration of the forty-five
(45)-day exercise period. If such right is exercised with respect to all the
Target Shares specified in the Disposition Notice, then the Corporation (or
its assignees) shall effect the repurchase of the Target Shares, including
payment of the purchase price, not more than ten (10) business days after
delivery of the Exercise Notice; and at such time Owner shall deliver to the
Corporation the certificates representing the Target Shares to be
repurchased, each certificate to be properly endorsed for transfer. To the
extent any of the Target Shares are at the time held in escrow under Article
VII, the certificates for such shares shall automatically be released from
escrow and delivered to the Corporation for purchase. Should the purchase
price specified in the Disposition Notice be payable in property other than
cash or evidences of indebtedness, the Corporation (or its assignees) shall
have the right to pay the purchase price in the form of cash equal in amount
to the value of such property. If the Owner and the Corporation (or its
assignees) cannot agree on such cash value within ten (10) days after the
Corporation's receipt of the Disposition Notice, the valuation shall be made
by an appraiser of recognized standing selected by the Owner and the
Corporation (or its assignees) or, if they cannot agree on an appraiser
within twenty (20) days after the Corporation's receipt of the Disposition
Notice, each shall select an appraiser of recognized standing and the two
appraisers shall designate a third appraiser of recognized standing, whose
appraisal shall be determinative of such value. The cost of such appraisal
shall be shared equally by the Owner and the Corporation. The closing shall
then be held on the LATER of (i) the tenth business day following delivery of
the Exercise Notice or (ii) the tenth business day after such cash valuation
shall have been made.
6.4 NON-EXERCISE OF RIGHT. In the event the Exercise Notice is
not given to Owner within forty-five (45) days following the date of the
Corporation's receipt of the Disposition Notice, Owner shall have a period of
thirty (30) days thereafter in which to sell or otherwise dispose of the
Target Shares to the third-party offeror identified in the Disposition Notice
upon terms and conditions (including the purchase price) no more favorable to
such third-party offeror than those specified in the Disposition Notice;
PROVIDED, however, that any such sale or disposition must not be effected in
contravention of the provisions of Article II of this Agreement. To the
extent any of the Target Shares are at the time held in escrow under Article
VII, the certificates for such shares shall automatically be released from
escrow and surrendered to the Owner. The third-party offeror shall acquire
the Target Shares free and clear of the Corporation's Repurchase Right under
Article V and the Corporation's First Refusal Right hereunder, but the
acquired shares shall remain subject to (i) the securities law restrictions
of paragraph 2.2(a) and (ii) the market stand-off provisions of paragraph
4.4. In the event Owner
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does not effect such sale or disposition of the Target Shares within the
specified thirty (30)-day period, the Corporation's First Refusal Right shall
continue to be applicable to any subsequent disposition of the Target Shares
by Owner until such right lapses in accordance with paragraph 6.7.
6.5 PARTIAL EXERCISE OF RIGHT. In the event the Corporation (or
its assignees) makes a timely exercise of the First Refusal Right with
respect to a portion, but not all, of the Target Shares specified in the
Disposition Notice, Owner shall have the option, exercisable by written
notice to the Corporation delivered within thirty (30) days after the date of
the Disposition Notice, to effect the sale of the Target Shares pursuant to
one of the following alternatives:
(i) sale or other disposition of all the Target Shares to
the third-party offeror identified in the Disposition Notice, but in full
compliance with the requirements of paragraph 6.4, as if the Corporation
did not exercise the First Refusal Right hereunder; or
(ii) sale to the Corporation (or its assignees) of the
portion of the Target Shares which the Corporation (or its assignees) has
elected to purchase, such sale to be effected in substantial conformity
with the provisions of paragraph 6.3.
Failure of Owner to deliver timely notification to the Corporation
under this paragraph 6.5 shall be deemed to be an election by Owner to sell
the Target Shares pursuant to alternative (i) above.
6.6 RECAPITALIZATION/MERGER.
(a) In the event of any stock dividend, stock split,
recapitalization or other transaction affecting the Corporation's
outstanding Common Stock as a class effected without receipt of
consideration, then any new, substituted or additional securities or other
property which is by reason of such transaction distributed with respect
to the Purchased Shares shall be immediately subject to the Corporation's
First Refusal Right hereunder, but only to the extent the Purchased Shares
are at the time covered by such right.
(b) In the event of any of the following transactions:
(i) a merger or consolidation in which the
Corporation is not the surviving entity,
(ii) a sale, transfer or other disposition of all or
substantially all of the Corporation's assets,
(iii) a reverse merger in which the Corporation is
the surviving entity but in which the Corporation's outstanding voting
securities are transferred in whole or in part to person or persons other
than those who held such securities immediately prior to the merger, or
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(iv) any transaction effected primarily to change the
State in which the Corporation is incorporated, or to create a holding
company structure,
the Corporation's First Refusal Right shall remain in
full force and effect and shall apply to the new capital stock or other
property received in exchange for the Purchased Shares in consummation of the
transaction but only to the extent the Purchased Shares are at the time
covered by such right.
6.7 LAPSE. The First Refusal Right under this Article VI shall
lapse and cease to have effect upon the EARLIEST to occur of (i) the first
date on which shares of the Corporation's Common Stock are held of record by
more than five hundred (500) persons, (ii) a determination is made by the
Corporation's Board of Directors that a public market exists for the
outstanding shares of the Corporation's Common Stock, or (iii) a firm
commitment underwritten public offering pursuant to an effective registration
statement under the 1933 Act, covering the offer and sale of the
Corporation's Common Stock in the aggregate amount of at least $20,000,000.
However, the market stand-off provisions of paragraph 4.4 shall continue to
remain in full force and effect following the lapse of the First Refusal
Right hereunder.
VII. ESCROW
7.1 DEPOSIT. Upon issuance, the certificates for any Unvested
Shares purchased hereunder shall be deposited in escrow with the Corporate
Secretary of the Corporation to be held in accordance with the provisions of
this Article VII. Each deposited certificate shall be accompanied by a
duly-executed Assignment Separate from Certificate in the form of Exhibit I.
The deposited certificates, together with any other assets or securities from
time to time deposited with the Corporate Secretary pursuant to the
requirements of this Agreement, shall remain in escrow until such time or
times as the certificates (or other assets and securities) are to be released
or otherwise surrendered for cancellation in accordance with paragraph 7.3.
Upon delivery of the certificates (or other assets and securities) to the
Corporate Secretary of the Corporation, the Owner shall be issued an
instrument of deposit acknowledging the number of Unvested Shares (or other
assets and securities) delivered in escrow.
7.2 RECAPITALIZATION. All regular cash dividends on the Unvested
Shares (or other securities at the time held in escrow) shall be paid
directly to the Owner and shall not be held in escrow. However, in the event
of any stock dividend, stock split, recapitalization or other change
affecting the Corporation's outstanding Common Stock as a class effected
without receipt of consideration or in the event of a Corporate Transaction,
any new, substituted or additional securities or other property which is by
reason of such transaction distributed with respect to the Unvested Shares
shall be immediately delivered to the Corporate Secretary to be held in
escrow under this Article VII, but only to the extent the Unvested Shares are
at the time subject to the escrow requirements of paragraph 7.1.
7.3 RELEASE/SURRENDER. The Unvested Shares, together with any
other assets or securities held in escrow hereunder, shall be subject to the
following terms and conditions relating to their release from escrow or their
surrender to the Corporation for repurchase and cancellation:
11
(i) Should the Corporation (or its assignees) elect to
exercise the Repurchase Right under Article V with respect to any Unvested
Shares, then the escrowed certificates for such Unvested Shares (together
with any other assets or securities issued with respect thereto) shall be
delivered to the Corporation concurrently with the payment to the Owner,
in cash or cash equivalent (including the cancellation of any purchase-
money indebtedness), of an amount equal to the aggregate Option Price for
such Unvested Shares, and the Owner shall cease to have any further rights
or claims with respect to such Unvested Shares (or other assets or
securities attributable to such Unvested Shares).
(ii) Should the Corporation (or its assignees) elect to
exercise its First Refusal Right under Article VI with respect to any
vested Target Shares held at the time in escrow hereunder, then the
escrowed certificates for such Target Shares (together with any other
assets or securities attributable thereto) shall, concurrently with the
payment of the paragraph 6.3 purchase price for such Target Shares to the
Owner, be surrendered to the Corporation, and the Owner shall cease to
have any further rights or claims with respect to such Target Shares (or
other assets or securities).
(iii) Should the Corporation (or its assignees) elect
NOT to exercise its First Refusal Right under Article VI with respect to
any Target Shares held at the time in escrow hereunder, then the escrowed
certificates for such Target Shares (together with any other assets or
securities attributable thereto) shall be surrendered to the Owner for
disposition in accordance with provisions of paragraph 6.4.
(iv) As the interest of the Optionee in the Unvested
Shares or any other assets or securities attributable thereto) vests in
accordance with the provisions of Article V, the certificates for such
vested shares (as well as all other vested assets and securities) shall be
released from escrow and delivered to the Owner in accordance with the
following schedule:
a. The initial release of vested shares (or
other vested assets and securities) from escrow shall be effected
within thirty (30) days following the expiration of the initial
twelve (12)-month period measured from the Grant Date.
b. Subsequent releases of vested shares (or
other vested assets and securities) from escrow shall be effected at
semi-annual intervals thereafter, with the first such semi-annual
release to occur eighteen (18) months after the Grant Date.
c. Upon the Optionee's cessation of Service,
any escrowed Purchased Shares (or other assets or securities) in
which the Optionee is at the time vested shall be promptly released
from escrow.
d. Upon any earlier termination of the
Corporation's Repurchase Right in accordance with the applicable
provisions of Article V, any Purchased Shares (or other assets or
securities) at the time held in escrow
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hereunder shall promptly be released to the Owner as fully-vested
shares or other property.
(v) All Purchased Shares (or other assets or securities)
released from escrow in accordance with the provisions of subparagraph
(iv) above shall nevertheless remain subject to (I) the Corporation's
First Refusal Right under Article VI until such right lapses pursuant to
paragraph 6.7, (II) the market stand-off provisions of paragraph 4.4 until
such provisions terminate in accordance therewith and (III) the Special
Purchase Right under Article VIII.
VIII. MARITAL DISSOLUTION OR LEGAL SEPARATION
8.1 GRANT. In connection with the dissolution of the Optionee's
marriage or the legal separation of the Optionee and the Optionee's spouse,
the Corporation shall have the right (the "Special Purchase Right"),
exercisable at any time during the thirty (30)-day period following the
Corporation's receipt of the required Dissolution Notice under paragraph 8.2,
to purchase from the Optionee's spouse, in accordance with the provisions of
paragraph 8.3, all or any portion of the Purchased Shares which would
otherwise be awarded to such spouse in settlement of any community property
or other marital property rights such spouse may have in such shares.
8.2 NOTICE OF DECREE OR AGREEMENT. The Optionee shall promptly
provide the Secretary of the Corporation with written notice (the
"Dissolution Notice") of (i) the entry of any judicial decree or order
resolving the property rights of the Optionee and the Optionee's spouse in
connection with their marital dissolution or legal separation or (ii) the
execution of any contract or agreement relating to the distribution or
division of such property rights. The Dissolution Notice shall be accompanied
by a copy of the actual decree of dissolution or settlement agreement between
the Optionee and the Optionee's spouse which provides for the award to the
spouse of one or more Purchased Shares in settlement of any community
property or other marital property rights such spouse may have in such shares.
8.3 EXERCISE OF SPECIAL PURCHASE RIGHT. The Special Purchase
Right shall be exercisable by delivery of written notice (the "Purchase
Notice") to the Optionee and the Optionee's spouse within thirty (30) days
after the Corporation's receipt of the Dissolution Notice. The Purchase
Notice shall indicate the number of shares to be purchased by the
Corporation, the date such purchase is to be effected (such date to be not
less than five (5) business days, nor more than ten (10) business days, after
the date of the Purchase Notice), and the fair market value to be paid for
such Purchased Shares. The Optionee (or the Optionee's spouse, to the extent
such spouse has physical possession of the Purchased Shares) shall, prior to
the close of business on the date specified for the purchase, deliver to the
Corporate Secretary of the Corporation the certificates representing the
shares to be purchased, each certificate to be properly endorsed for
transfer. To the extent any of the shares to be purchased by the Corporation
are at the time held in escrow under Article VII, the certificates for such
shares shall be promptly delivered out of escrow to the Corporation. The
Corporation shall, concurrently with the receipt of the stock certificates,
pay to the Optionee's spouse (in cash or cash equivalents) an amount equal to
the fair market value specified for such shares in the Purchase Notice.
13
If the Optionee's spouse does not agree with the fair market
value specified for the shares in the Purchase Notice, then the spouse shall
promptly notify the Corporation in writing of such disagreement and the fair
market value of such shares shall thereupon be determined by an appraiser of
recognized standing selected by the Corporation and the spouse. If they
cannot agree on an appraiser within twenty (20) days after the date of the
Purchase Notice, each shall select an appraiser of recognized standing, and
the two appraisers shall designate a third appraiser of recognized standing
whose appraisal shall be determinative of such value. The cost of the
appraisal shall be shared equally by the Corporation and the Optionee's
spouse. The closing shall then be held on the fifth business day following
the completion of such appraisal; PROVIDED, however, that if the appraised
value is more than fifteen percent (15%) greater than the fair market value
specified for the shares in the Purchase Notice, the Corporation shall have
the right, exercisable prior to the expiration of such five (5)-business-day
period, to rescind the exercise of the Special Purchase Right and thereby
revoke its election to purchase the shares awarded to the spouse.
8.4 LAPSE. The Special Purchase Right under this Article VIII
shall lapse and cease to have effect upon the EARLIER to occur of (i) the
first date on which the First Refusal Right under Article VI lapses or (ii)
the expiration of the thirty (30)-day exercise period specified in paragraph
8.3, to the extent the Special Purchase Right is not timely exercised in
accordance with such paragraph.
IX. GENERAL PROVISIONS
9.1 ASSIGNMENT. The Corporation may assign its Repurchase Right
under Article V, its First Refusal Right under Article VI and/or its Special
Purchase Right under Article VIII to any person or entity selected by the
Corporation's Board of Directors, including (without limitation) one or more
shareholders of the Corporation.
If the assignee of the Repurchase Right is other than a one
hundred percent (100%) owned subsidiary corporation of the Corporation or the
parent corporation owning one hundred percent (100%) of the Corporation, then
such assignee must make a cash payment to the Corporation, upon the
assignment of the Repurchase Right, in an amount equal to the excess (if any)
of (i) the fair market value of the Unvested Shares at the time subject to
the assigned Repurchase Right over (ii) the aggregate repurchase price
payable for the Unvested Shares thereunder.
9.2 DEFINITIONS. For purposes of this Agreement, the following
provisions shall be applicable in determining the parent and subsidiary
corporations of the Corporation:
(i) Any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation shall be
considered to be a parent corporation of the Corporation, provided each
such corporation in the unbroken chain (other than the Corporation) owns,
at the time of the determination, stock possessing fifty percent (50%) or
more of the total combined voting power of all classes of stock in one of
the other corporations in such chain.
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(ii) Each corporation (other than the Corporation) in an
unbroken chain of corporations beginning with the Corporation shall be
considered to be a subsidiary of the Corporation, provided each such
corporation (other than the last corporation) in the unbroken chain owns,
at the time of the determination, stock possessing fifty percent (50%) or
more of the total combined voting power of all classes of stock in one of
the other corporations in such chain.
9.3 NO EMPLOYMENT OR SERVICE CONTRACT. Nothing in this Agreement
or in the Plan shall confer upon the Optionee any right to continue in the
Service of the Corporation (or any parent or subsidiary corporation of the
Corporation employing or retaining Optionee) for any period of specific
duration or interfere with or otherwise restrict in any way the rights of the
Corporation (or any parent or subsidiary corporation of the Corporation
employing or retaining Optionee) or the Optionee, which rights are hereby
expressly reserved by each, to terminate the Optionee's Service at any time
for any reason whatsoever, with or without cause.
9.4 CERTAIN POOLING TRANSACTIONS. In the event that the Board of
Directors of the Corporation and holders of a majority of the Common Stock
issuable or issued upon conversion of the Series A Preferred Stock of the
Corporation vote in favor of a Pooling Corporate Transaction (as defined
below), each Optionee and Owner hereby agrees not to take any action
inconsistent with the pooling-of-interest accounting treatment to the extent
applicable to such Pooling Corporate Transaction, as reasonably deemed
necessary by the Corporation's Board of Directors. For purposes of this
Section 9.4, Pooling Corporate Transaction shall mean the acquisition of the
Corporation by another entity by means of any transaction or series of
related transactions (including, without limitation, any reorganization,
merger or consolidation) that results in the transfer of fifty percent (50%)
or more of the outstanding voting power of the Corporation.
9.5 NOTICES. Any notice required in connection with (i) the
Repurchase Right, the Special Purchase Right or the First Refusal Right or
(ii) the disposition of any Purchased Shares covered thereby shall be given
in writing and shall be deemed effective upon personal delivery or upon
deposit in the United States mail, registered or certified, postage prepaid
and addressed to the party entitled to such notice at the address indicated
below such party's signature line on this Agreement or at such other address
as such party may designate by ten (10) days advance written notice under
this paragraph 9.4 to all other parties to this Agreement.
9.6 NO WAIVER. The failure of the Corporation (or its assignees)
in any instance to exercise the Repurchase Right granted under Article V, or
the failure of the Corporation (or its assignees) in any instance to exercise
the First Refusal Right granted under Article VI, or the failure of the
Corporation (or its assignees) in any instance to exercise the Special
Purchase Right granted under Article VIII shall not constitute a waiver of
any other repurchase rights and/or rights of first refusal that may
subsequently arise under the provisions of this Agreement or any other
agreement between the Corporation and the Optionee or the Optionee's spouse.
No waiver of any breach or condition of this Agreement shall be deemed to be
a waiver of any other or subsequent breach or condition, whether of like or
different nature.
9.7 CANCELLATION OF SHARES. If the Corporation (or its assignees)
shall make available, at the time and place and in the amount and form
provided in this Agreement, the
15
consideration for the Purchased Shares to be repurchased in accordance with
the provisions of this Agreement, then from and after such time, the person
from whom such shares are to be repurchased shall no longer have any rights
as a holder of such shares (other than the right to receive payment of such
consideration in accordance with this Agreement), and such shares shall be
deemed purchased in accordance with the applicable provisions hereof and the
Corporation (or its assignees) shall be deemed the owner and holder of such
shares, whether or not the certificates therefor have been delivered as
required by this Agreement.
X. MISCELLANEOUS PROVISIONS
10.1 OPTIONEE UNDERTAKING. Optionee hereby agrees to take whatever
additional action and execute whatever additional documents the Corporation
may in its judgment deem necessary or advisable in order to carry out or
effect one or more of the obligations or restrictions imposed on either the
Optionee or the Purchased Shares pursuant to the express provisions of this
Agreement.
10.2 AGREEMENT IS ENTIRE CONTRACT. This Agreement constitutes the
entire contract between the parties hereto with regard to the subject matter
hereof. This Agreement is made pursuant to the provisions of the Plan and
shall in all respects be construed in conformity with the express terms and
provisions of the Plan.
10.3 GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of California, as such
laws are applied to contracts entered into and performed in such State
without resort to that State's conflict-of-laws rules.
10.4 COUNTERPARTS. This Agreement may be executed in counterparts,
each of which shall be deemed to be an original, but all of which together
shall constitute one and the same instrument.
10.5 SUCCESSORS AND ASSIGNS. The provisions of this Agreement
shall inure to the benefit of, and be binding upon, the Corporation and its
successors and assigns and the Optionee and the Optionee's legal
representatives, heirs, legatees, distributees, assigns and transferees by
operation of law, whether or not any such person shall have become a party to
this Agreement and have agreed in writing to join herein and be bound by the
terms and conditions hereof.
10.6 POWER OF ATTORNEY. Optionee's spouse hereby appoints Optionee
his or her true and lawful attorney in fact, for him or her and in his or her
name, place and stead, and for his or her use and benefit, to agree to any
amendment or modification of this Agreement and to execute such further
instruments and take such further actions as may reasonably be necessary to
carry out the intent of this Agreement. Optionee's spouse further gives and
grants unto Optionee as his or her attorney in fact full power and authority
to do and perform every act necessary and proper to be done in the exercise
of any of the foregoing powers as fully as he or she might or could do if
personally present, with full power of substitution and revocation, hereby
ratifying and confirming all that Optionee shall lawfully do and cause to be
done by virtue of this power of attorney.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
16
IN WITNESS WHEREOF, the parties have executed this Agreement on the
day and year first indicated above.
RHYTHMS NETCONNECTIONS INC.
By:
Title:____________________________________
Address:
__________________________________________
__________________________________________
__________________________________________
Optionee*
Address:__________________________________________
__________________________________________
The undersigned spouse of Optionee has read and hereby approves the
foregoing Stock Purchase Agreement. In consideration of the Corporation's
granting the Optionee the right to acquire the Purchased Shares in accordance
with the terms of such Agreement, the undersigned hereby agrees to be
irrevocably bound by all the terms and provisions of such Agreement,
including (specifically) the right of the Corporation (or its assignees) to
purchase any and all interest or right the undersigned may otherwise have in
such shares pursuant to community property laws or other marital property
rights.
__________________________________________
Optionee's Spouse
Address:
__________________________________________
__________________________________________
--------------
* I have executed the Section 83(b) election that was attached hereto as an
Exhibit. As set forth in Article III, I understand that I, and NOT the
Corporation, will be responsible for completing the form and filing the
election with the appropriate office of the Federal and State tax authorities
and that if such filing is not completed within thirty (30) days after the
date of this Agreement, I will not be entitled to the tax benefits provided
by Section 83(b).
17
EXHIBIT I
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED _____________________ hereby sell(s), assign(s)
and transfer(s) unto Rhythms NetConnections Inc. (the "Corporation"),
_____________________ (____________) shares of the Common Stock of the
Corporation standing in his\her name on the books of the Corporation
represented by Certificate No. _________________ and do hereby irrevocably
constitute and appoint ________________________ as Attorney to transfer the
said stock on the books of the Corporation with full power of substitution in
the premises.
Dated: ________________________
Signature____________________________________
INSTRUCTION: Please do not fill in any blanks other than the signature line.
The purpose of this assignment is to enable the Corporation to exercise its
Repurchase Right set forth in the Agreement without requiring additional
signatures on the part of the Optionee.
REPURCHASE RIGHTS
EXHIBIT II
SECTION 83(b) TAX ELECTION
This statement is being made under Section 83(b) of the Internal Revenue Code,
pursuant to Treas. Reg. Section 1.83-2.
(1) The taxpayer who performed the services is:
Name:
Address:
Taxpayer Ident. No.:
(2) The property with respect to which the election is being made is _________
shares of the common stock of Rhythms NetConnections Inc.
(3) The property was issued on ____________, 19___.
(4) The taxable year in which the election is being made is the calendar
year 19__.
(5) The property is subject to a repurchase right pursuant to which the issuer
has the right to acquire the property at the original purchase price if for
any reason taxpayer's employment with the issuer is terminated. The
issuer's repurchase right lapses in a series of annual and monthly
installments over a four year period ending on ____________, 19___.
(6) The fair market value at the time of transfer (determined without regard
to any restriction other than a restriction which by its terms will never
lapse) is $____________ per share.
(7) The amount paid for such property is $____________ per share.
(8) A copy of this statement was furnished to Rhythms NetConnections Inc. for
whom taxpayer rendered the services underlying the transfer of property.
(9) This statement is executed as of: ________________________.
__________________________ _____________________________
Spouse (if any) Taxpayer
This form must be filed with the Internal Revenue Service Center with which
taxpayer files his/her Federal income tax returns. The filing must be made
within 30 days after the execution date of the Stock Purchase Agreement.
SPECIAL PROTECTIVE ELECTION PURSUANT TO SECTION 83(b)
OF THE INTERNAL REVENUE CODE WITH RESPECT TO PROPERTY
ACQUIRED UPON EXERCISE OF AN INCENTIVE STOCK OPTION
The property described in the above Section 83(b) election is comprised of
shares of common stock acquired pursuant to the exercise of an incentive
stock option under Section 422 of the Code. Accordingly, it is the intent of
the Taxpayer to utilize this election to achieve the following tax results:
1. The purpose of this election is to have the alternative
minimum taxable income attributable to the purchased shares measured by the
amount by which the fair market value of such shares at the time of their
transfer to the Taxpayer exceeds the purchase price paid for the shares. In
the absence of this election, such alternative minimum taxable income would
be measured by the spread between the fair market value of the purchased
shares and the purchase price which exists on the various lapse dates in
effect for the forfeiture restrictions applicable to such shares. The
election is to be effective to the full extent permitted under the Internal
Revenue Code.
2. Section 421(a)(1) of the Code expressly excludes from income
any excess of the fair market value of the purchased shares over the amount
paid for such shares. Accordingly, this election is also intended to be
effective in the event there is a "disqualifying disposition" of the shares,
within the meaning of Section 421(b) of the Code, which would otherwise
render the provisions of Section 83(a) of the Code applicable at that time.
Consequently, the Taxpayer hereby elects to have the amount of disqualifying
disposition income measured by the excess of the fair market value of the
purchased shares on the date of transfer to the Taxpayer over the amount paid
for such shares. Since Section 421(a) presently applies to the shares which
are the subject of this Section 83(b) election, no taxable income is actually
recognized for regular tax purposes at this time, and no income taxes are
payable, by the Taxpayer as a result of this election.
This form should be filed with the Internal Revenue Service Center with which
taxpayer files his/her Federal income tax returns. The filing must be made
within 30 days after the execution date of the Stock Purchase Agreement.
NOTE: PAGE 2 SHOULD BE ATTACHED ONLY IF YOU ARE
EXERCISING AN INCENTIVE STOCK OPTION.
RHYTHMS NETCONNECTIONS INC.
STOCK OPTION AGREEMENT
RECITALS
A. The Board of Directors of the Corporation has adopted the
Rhythms NetConnections Inc. 1997 Stock Option/Stock Issuance Plan (the "Plan")
for the purpose of attracting and retaining the services of persons who
contribute to the growth and financial success of the Corporation.
B. Optionee is a person who the Plan Administrator believes has and
will contribute to the growth and financial success of the Corporation and this
Agreement is executed pursuant to and is intended to carry out the purposes of
the Plan.
AGREEMENT
NOW, THEREFORE, it is hereby agreed as follows:
1. GRANT OF OPTION. Subject to and upon the terms and conditions set
forth in this Agreement, the Corporation hereby grants to Optionee, as of the
grant date (the "Grant Date") specified in the accompanying Notice of Grant of
Stock Option (the "Grant Notice"), a stock option to purchase up to that number
of shares of the Corporation's Common Stock (the "Option Shares") as is
specified in the Grant Notice. The Option Shares shall be purchasable from
time to time during the option term at the option price per share (the "Option
Price") specified in the Grant Notice. Capitalized terms used herein which are
not otherwise defined shall have the meaning ascribed to such terms in the
Plan.
2. OPTION TERM. This option shall have a maximum term of ten (10) years
measured from the Grant Date and shall expire at the close of business on the
expiration date (the "Expiration Date") specified in the Grant Notice, unless
sooner terminated in accordance with Paragraph 5, 6 or 17.
3. LIMITED TRANSFERABILITY. This option shall be neither transferable
nor assignable by Optionee other than by will or by the laws of descent and
distribution following Optionee's death and may be exercised, during Optionee's
lifetime, only by Optionee.
4. DATES OF EXERCISE. This option may not be exercised in whole or in
part at any time prior to the time the Plan is approved by the Corporation's
shareholders in accordance with Paragraph 17. Provided such shareholder
approval is obtained, this option shall thereupon become exercisable for the
Option Shares in one or more installments as is specified in the Grant Notice.
As the option becomes exercisable in one or more installments, the installments
shall accumulate and the option shall remain exercisable for such installments
until the Expiration Date or the sooner termination of the option term under
Paragraph 5 or Paragraph 6 of this Agreement.
5. SPECIAL TERMINATION OF OPTION TERM. The option term specified in
Paragraph 2 shall terminate (and this option shall cease to be exercisable)
prior to the Expiration Date should any of the following provisions become
applicable:
(i) Except as otherwise provided in subparagraph (ii) or
(iii) below, should Optionee cease to remain in Service while this option
is outstanding, then the period for exercising this option shall be
reduced to a three (3)-month period commencing with the date of such
cessation of Service, but in no event shall this option be exercisable at
any time after the Expiration Date. Upon the expiration of such three (3)-
month period or (if earlier) upon the Expiration Date, this option shall
terminate and cease to be outstanding.
(ii) Should Optionee die while this option is outstanding,
then the personal representative of the Optionee's estate or the person or
persons to whom the option is transferred pursuant to the Optionee's will
or in accordance with the law of descent and distribution shall have the
right to exercise this option. Such right shall lapse and this option
shall cease to be exercisable upon the EARLIER of (A) the expiration of
the twelve (12) month period measured from the date of Optionee's death or
(B) the Expiration Date. Upon the expiration of such twelve (12) month
period or (if earlier) upon the Expiration Date, this option shall
terminate and cease to be outstanding.
(iii) Should Optionee become permanently disabled and
cease by reason thereof to remain in Service while this option is
outstanding, then the Optionee shall have a period of twelve (12) months
(commencing with the date of such cessation of Service) during which to
exercise this option, but in no event shall this option be exercisable at
any time after the Expiration Date. Optionee shall be deemed to be
permanently disabled if Optionee is unable to engage in any substantial
gainful activity for the Corporation or the parent or subsidiary
corporation retaining his/her services by reason of any medically
determinable physical or mental impairment, which can be expected to
result in death or which has lasted or can be expected to last for a
continuous period of not less than twelve (12) months. Upon the
expiration of such limited period of exercisability or (if earlier) upon
the Expiration Date, this option shall terminate and cease to be
outstanding.
(iv) During the limited period of exercisability applicable
under subparagraph (i), (ii) or (iii) above, this option may be exercised
for any or all of the Option Shares for which this option is, at the time
of the Optionee's cessation of Service, exercisable in accordance with the
exercise schedule specified in the Grant Notice and the provisions of
Paragraph 6 of this Agreement.
(v) For purposes of this Paragraph 5 and for all other
purposes under this Agreement:
A. The Optionee shall be deemed to remain in SERVICE for so long as
the Optionee continues to render periodic services to the Corporation or any
parent or subsidiary corporation, whether as an Employee, a non-employee member
of the board of directors, or an independent contractor or consultant.
2
B. The Optionee shall be deemed to be an EMPLOYEE of the
Corporation and to continue in the Corporation's employ for so long as the
Optionee remains in the employ of the Corporation or one or more of its parent
or subsidiary corporations, subject to the control and direction of the
employer entity as to both the work to be performed and the manner and method
of performance.
C. A corporation shall be considered to be a SUBSIDIARY corporation
of the Corporation if it is a member of an unbroken chain of corporations
beginning with the Corporation, provided each such corporation in the chain
(other than the last corporation) owns, at the time of determination, stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.
D. A corporation shall be considered to be a PARENT corporation of
the Corporation if it is a member of an unbroken chain ending with the
Corporation, provided each such corporation in the chain (other than the
Corporation) owns, at the time of determination, stock possessing 50% or more
of the total combined voting power of all classes of stock in one of the other
corporations in such chain.
6. EFFECT OF CORPORATE TRANSACTION.
A. Optionee shall automatically vest with respect to a portion of
the Option Shares in the event of a Corporate Transaction so that such portion
shall, immediately prior to the effective date of the Corporate Transaction,
become fully exercisable for vested shares of Common Stock, provided that no
Option Shares shall automatically vest in full if and to the extent: (i) this
option is, in connection with the Corporate Transaction, either to be assumed
by the successor corporation (or parent thereof) or to be replaced with a
comparable option to purchase shares of the capital stock of the successor
corporation (or parent thereof), or (ii) such option is to be replaced with a
cash incentive program of the successor corporation which preserves the spread
existing on the unvested option shares at the time of the Corporate Transaction
and provides for subsequent payout in accordance with the same vesting schedule
applicable to those option shares. The determination of option comparability
under clause (i) above shall be made by the Plan Administrator, and its
determination shall be final, binding and conclusive. The portion of the
Option Shares which will automatically vest hereunder shall be a number of
shares equal to the number of unvested Option Shares immediately prior to the
Corporate Transaction multiplied by a fraction, the NUMERATOR of which is the
number of complete months of which elapsed after the Vesting Commencement Date
set forth in the Grant Notice and the date of the Corporate Transaction, and
the DENOMINATOR of which is the number of months required under the Grant
Notice for the rights of Optionee to become fully vested.
B. To the extent not previously exercised, this Option shall
terminate and cease to be exercisable upon the consummation of a Corporate
Transaction unless it is expressly assumed by the successor corporation or
parent thereof.
C. Option Shares available under any options which are assumed or
replaced in the Corporate Transaction and do not otherwise accelerate at that
time, shall automatically vest in full in the event the Optionee's Service
should subsequently terminated by reason of an Involuntary Termination within
twenty-four (24) months following the effective date of such
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Corporate Transaction. Any options so accelerated shall remain exercisable for
fully-vested shares until the EARLIER of (i) the expiration of the option term
or (ii) the expiration of the one (1)-year period measured from the effective
date of the Involuntary Termination.
D. This Agreement shall not in any way affect the right of the
Corporation to adjust, reclassify, reorganize or otherwise make changes in its
capital or business structure or to merge, consolidate, dissolve, liquidate or
sell or transfer all or any part of its business or assets.
7. EFFECT OF HOSTILE CHANGE IN CONTROL.
In the event of any Hostile Change in Control, Optionee shall
automatically vest in full with respect to all Option Shares so that each such
option shall, immediately prior to the effective date of the Hostile Change in
Control, be fully exercisable for any or all of Option Shares as fully-vested
shares of Common Stock.
8. ADJUSTMENT IN OPTION SHARES.
A. In the event any change is made to the Corporation's outstanding
Common Stock by reason of any stock split, stock dividend, combination of
shares, exchange of shares, or other change affecting the outstanding Common
Stock as a class without receipt of consideration, then appropriate adjustments
shall be made to (i) the total number of Option Shares subject to this option,
(ii) the number of Option Shares for which this option is to be exercisable
from and after each installment date specified in the Grant Notice and (iii)
the Option Price payable per share in order to reflect such change and thereby
preclude a dilution or enlargement of benefits hereunder.
B. If this option is to be assumed in connection with a Corporate
Transaction described in Paragraph 6 or is otherwise to remain outstanding,
then this option shall be appropriately adjusted, immediately after such
Corporate Transaction, to apply and pertain to the number and class of
securities which would have been issuable to the Optionee in the consummation
of such Corporate Transaction had the option been exercised immediately prior
to such Corporate Transaction, and appropriate adjustments shall also be made
to the Option Price payable per share, PROVIDED the aggregate Option Price
payable hereunder shall remain the same.
9. PRIVILEGE OF STOCK OWNERSHIP. The holder of this option shall not
have any of the rights of a shareholder with respect to the Option Shares until
such individual shall have exercised the option and paid the Option Price.
10. MANNER OF EXERCISING OPTION.
A. In order to exercise this option with respect to all or any part
of the Option Shares for which this option is at the time exercisable, Optionee
(or in the case of exercise after Optionee's death, the Optionee's executor,
administrator, heir or legatee, as the case may be) must take the following
actions:
(i) Execute and deliver to the Secretary of the
Corporation a stock purchase agreement (the "Purchase Agreement") in
substantially the form of Exhibit B to the Grant Notice.
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(ii) Pay the aggregate Option Price for the purchased
shares in one or more forms approved under the Plan.
(iii) Furnish to the Corporation appropriate
documentation that the person or persons exercising the option, if other
than Optionee, have the right to exercise this option.
B. For purposes of this Agreement, the Exercise Date shall be the
date on which the executed Purchase Agreement shall have been delivered to the
Corporation, and the fair market value of a share of Common Stock on any
relevant date shall be determined in accordance with subparagraphs (i) through
(iii) below:
(i) If the Common Stock is not at the time listed or
admitted to trading on any stock exchange but is traded on the Nasdaq
National Market System, the fair market value shall be the closing selling
price of one share of Common Stock on the date in question, as such price
is reported by the National Association of Securities Dealers through its
Nasdaq system or any successor system. If there is no closing selling
price for the Common Stock on the date in question, then the closing
selling price on the last preceding date for which such quotation exists
shall be determinative of fair market value.
(ii) If the Common Stock is at the time listed or
admitted to trading on any stock exchange, then the fair market value
shall be the closing selling price per share of Common Stock on the date
in question on the stock exchange determined by the Plan Administrator
to be the primary market for the Common Stock, as such price is officially
quoted in the composite tape of transactions on such exchange. If there
is no reported sale of Common Stock on such exchange on the date in
question, then the fair market value shall be the closing selling price
on the exchange on the last preceding date for which such quotation exists.
(iii) If the Common Stock at the time is neither listed
nor admitted to trading on any stock exchange nor traded in the over-the-
counter market, or if the Plan Administrator determines that the value
determined pursuant to subparagraphs (i) and (ii) above does not
accurately reflect the fair market value of the Common Stock, then such
fair market value shall be determined by the Plan Administrator after
taking into account such factors as the Plan Administrator shall deem
appropriate.
C. As soon after the Exercise Date as practical, the Corporation
shall mail or deliver to Optionee or to the other person or persons exercising
this option a certificate or certificates representing the shares so purchased
and paid for, with the appropriate legends affixed thereto.
D. In no event may this option be exercised for any fractional
shares.
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11. COMPLIANCE WITH LAWS AND REGULATIONS.
A. The exercise of this option and the issuance of Option Shares
upon such exercise shall be subject to compliance by the Corporation and the
Optionee with all applicable requirements of law relating thereto and with all
applicable regulations of any stock exchange on which shares of the
Corporation's Common Stock may be listed at the time of such exercise and
issuance.
B. B. In connection with the exercise of this option, Optionee
shall execute and deliver to the Corporation such representations in writing as
may be requested by the Corporation in order for it to comply with the
applicable requirements of Federal and State securities laws.
12. SUCCESSORS AND ASSIGNS. Except to the extent otherwise provided in
Paragraph 3 or 6, the provisions of this Agreement shall inure to the benefit
of, and be binding upon, the successors, administrators, heirs, legal
representatives and assigns of Optionee and the successors and assigns of the
Corporation.
13. LIABILITY OF CORPORATION.
A. If the Option Shares covered by this Agreement exceed, as of the
Grant Date, the number of shares of Common Stock which may without shareholder
approval be issued under the Plan, then this option shall be void with respect
to such excess shares, unless shareholder approval of an amendment sufficiently
increasing the number of shares of Common Stock issuable under the Plan is
obtained in accordance with the provisions of Article IV, Section 3, of the
Plan.
B. The inability of the Corporation to obtain approval from any
regulatory body having authority deemed by the Corporation to be necessary to
the lawful issuance and sale of any Common Stock pursuant to this option shall
relieve the Corporation of any liability with respect to the non-issuance or
sale of the Common Stock as to which such approval shall not have been
obtained. The Corporation, however, shall use its best efforts to obtain all
such approvals.
14. NOTICES. Any notice required to be given or delivered to the
Corporation under the terms of this Agreement shall be in writing and addressed
to the Corporation in care of the Corporate Secretary at its principal
corporate offices. Any notice required to be given or delivered to Optionee
shall be in writing and addressed to Optionee at the address indicated below
Optionee's signature line on the Grant Notice. All notices shall be deemed to
have been given or delivered upon personal delivery or upon deposit in the U.S.
mail, postage prepaid and properly addressed to the party to be notified.
15. LOANS. The Plan Administrator may, in its absolute discretion and
without any obligation to do so, assist the Optionee in the exercise of this
option by (i) authorizing the extension of a loan to the Optionee from the
Corporation or (ii) permitting the Optionee to pay the option price for the
purchased Common Stock in installments over a period of years. The terms of
any such loan or installment method of payment (including the interest rate,
the
6
requirements for collateral and the terms of repayment) shall be established
by the Plan Administrator in its sole discretion.
16. CONSTRUCTION. This Agreement and the option evidenced hereby are
made and granted pursuant to the Plan and are in all respects limited by and
subject to the express terms and provisions of the Plan. All decisions of the
Plan Administrator with respect to any question or issue arising under the Plan
or this Agreement shall be conclusive and binding on all persons having an
interest in this option.
17. GOVERNING LAW. The interpretation, performance, and enforcement of
this Agreement shall be governed by the laws of the State of California without
resort to that State's conflict-of-laws rules.
18. SHAREHOLDER APPROVAL. The grant of this option is subject to
approval of the Plan by the Corporation's shareholders within twelve (12)
months after the adoption of the Plan by the Board of Directors.
NOTWITHSTANDING ANY PROVISION OF THIS AGREEMENT TO THE CONTRARY, THIS OPTION
MAY NOT BE EXERCISED IN WHOLE OR IN PART UNTIL SUCH SHAREHOLDER APPROVAL IS
OBTAINED. In the event that such shareholder approval is not obtained, then
this option shall thereupon terminate in its entirety and the Optionee shall
have no further rights to acquire any Option Shares hereunder.
19. ADDITIONAL TERMS APPLICABLE TO AN INCENTIVE STOCK OPTION. In the
event this option is designated an incentive stock option in the Grant Notice,
the following terms and conditions shall also apply to the grant:
A. This option shall cease to qualify for favorable tax treatment
as an incentive stock option under the Federal tax laws if (and to the extent)
this option is exercised for one or more Option Shares: (i) more than three
(3) months after the date the Optionee ceases to be an Employee for any reason
other than death or permanent disability (as defined in Paragraph 5) or (ii)
more than one (1) year after the date the Optionee ceases to be an Employee by
reason of permanent disability.
B. Should this option be designated as immediately exercisable in
the Grant Notice, then this option shall not become exercisable in the calendar
year in which granted if (and to the extent) the aggregate fair market value
(determined at the Grant Date) of the Corporation's Common Stock for which this
option would otherwise first become exercisable in such calendar year would,
when added to the aggregate fair market value (determined as of the respective
date or dates of grant) of the Corporation's Common Stock for which this option
or one or more other incentive stock options granted to the Optionee prior to
the Grant Date (whether under the Plan or any other option plan of the
Corporation or its parent or subsidiary corporations) first become exercisable
during the same calendar year, exceed One Hundred Thousand Dollars ($100,000)
in the aggregate. To the extent the exercisability of this option is deferred
by reason of the foregoing limitation, the deferred portion will first become
exercisable in the first calendar year or years thereafter in which the One
Hundred Thousand Dollar ($100,000) limitation of this Paragraph 18.B would not
be contravened.
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C. Should this option be designated as exercisable in installments
in the Grant Notice, then no installment under this option (whether annual or
monthly) shall qualify for favorable tax treatment as an incentive stock option
under the Federal tax laws if (and to the extent) the aggregate fair market
value (determined at the Grant Date) of the Corporation's Common Stock for
which such installment first becomes exercisable hereunder will, when added to
the aggregate fair market value (determined as of the respective date or dates
of grant) of the Corporation's Common Stock for which one or more other
incentive stock options granted to the Optionee prior to the Grant Date
(whether under the Plan or any other option plan of the Corporation or any
parent or subsidiary corporation) first become exercisable during the same
calendar year, exceed One Hundred Thousand Dollars ($100,000) in the aggregate.
20. WITHHOLDING. Optionee hereby agrees to make appropriate arrangements
with the Corporation or parent or subsidiary corporation employing Optionee for
the satisfaction of all Federal, State or local income tax withholding
requirements and Federal social security employee tax requirements applicable
to the exercise of this option.
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RHYTHMS NETCONNECTIONS INC.
1997 STOCK OPTION/STOCK ISSUANCE PLAN
ARTICLE ONE
GENERAL PROVISIONS
I. PURPOSE OF THE PLAN
This 1997 Stock Option/Stock Issuance Plan is intended to promote the
interests of Rhythms NetConnections Inc. by providing eligible persons with the
opportunity to acquire a proprietary interest, or otherwise increase their
proprietary interest, in the Corporation as an incentive for them to remain in
the service of the Corporation.
Capitalized terms shall have the meanings assigned to such terms in
the attached Appendix.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into two separate equity programs:
- the Discretionary Option Grant Program under which eligible
persons may, at the discretion of the Plan Administrator, be granted options to
purchase shares of Common Stock, and
- the Stock Issuance Program under which eligible persons
may, at the discretion of the Plan Administrator, be issued shares of Common
Stock directly, either through the immediate purchase of such shares or as a
bonus for services rendered the Corporation (or any Parent or Subsidiary).
B. The provisions of Articles One and Four shall apply to all
equity programs under the Plan and shall govern the interests of all persons
under the Plan.
III. ADMINISTRATION OF THE PLAN
A. Except as provided in Paragraph B of this Section III, the Plan
shall be administered by the Board or one or more committees appointed by the
Board, provided that (1) beginning with the Section 12 Registration Date, the
Primary Committee shall have sole and exclusive authority to administer the
Plan with respect to Section 16 Insiders, and (2) administration of the Plan
may otherwise, at the Board's discretion, be vested in the Primary Committee or
a Secondary Committee.
B. Members of the Primary Committee or any Secondary Committee
shall serve for such period of time as the Board may determine and may be
removed by the Board at any time. The Board may also at any time terminate the
functions of any Secondary Committee and reassume all powers and authority
previously delegated to such committee.
C. Each Plan Administrator shall, within the scope of its
administrative functions under the Plan, have full power and authority (subject
to the provisions of the Plan) to establish such rules and regulations as it
may deem appropriate for proper administration of the Discretionary Option
Grant and Stock Issuance Programs and to make such determinations under, and
issue such interpretations of, the provisions of such programs and any
outstanding options or stock issuances thereunder as it may deem necessary or
advisable. Decisions of the Plan Administrator within the scope of its
administrative functions under the Plan shall be final and binding on all
parties who have an interest in the Discretionary Option Grant and Stock
Issuance Programs under its jurisdiction or any option or stock issuance
thereunder.
D. Service on the Primary Committee or the Secondary Committee
shall constitute service as a Board member, and members of each such committee
shall accordingly be entitled to full indemnification and reimbursement as
Board members for their service on such committee. No member of the Primary
Committee or the Secondary Committee shall be liable for any act or omission
made in good faith with respect to the Plan or any option grants or stock
issuances under the Plan.
IV. ELIGIBILITY
A. The persons eligible to participate in the Discretionary Option
Grant and Stock Issuance Programs are as follows:
(i) Employees,
(ii) non-employee members of the Board or the board of
directors of any Parent or Subsidiary, and
(iii) consultants and other independent advisors who
provide services to the Corporation (or any Parent or Subsidiary).
B. Each Plan Administrator shall, within the scope of its
administrative jurisdiction under the Plan, have full authority to determine,
(i) with respect to the option grants under the Discretionary Option Grant
Program, which eligible persons are to receive option grants, the time or times
when such option grants are to be made, the number of shares to be covered by
each such grant, the status of the granted option as either an Incentive Option
or a Non-Statutory Option, the time or times when each option is to become
exercisable, the vesting schedule (if any) applicable to the option shares and
the maximum term for which the option is to remain outstanding and (ii) with
respect to stock issuances under the Stock Issuance Program, which eligible
persons are to receive stock issuances, the time or times when such issuances
are to be made, the number of shares to be issued to each Participant, the
vesting schedule (if any) applicable to the issued shares and the consideration
for such shares.
C. The Plan Administrator shall have the absolute discretion either
to grant options in accordance with the Discretionary Option Grant Program or
to effect stock issuances in accordance with the Stock Issuance Program.
2
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of
authorized but unissued or reacquired Common Stock, including
shares repurchased by the Corporation on the open market. The
maximum number of shares of Common Stock initially reserved for
issuance over the term of the Plan shall not exceed 4,863,971
shares.
B. Shares of Common Stock subject to outstanding options shall be
available for subsequent issuance under the Plan to the extent
those options expire or terminate for any reason prior to exercise
in full. Unvested shares issued under the Plan and subsequently
cancelled or repurchased by the Corporation, at the original issue
price paid per share, pursuant to the Corporation's repurchase
rights under the Plan shall not be added back to the number of
shares of Common Stock reserved for issuance under the Plan.
C. If any change is made to the Common Stock by reason of any
stock split, stock dividend, recapitalization, combination of
shares, exchange of shares or other change affecting the
outstanding Common Stock as a class without the Corporation's
receipt of consideration, appropriate adjustments shall be made to
(i) the maximum number and/or class of securities issuable under
the Plan, (ii) the number and/or class of securities for which any
one person may be granted stock options, separately exercisable
stock appreciation rights and direct stock issuances under this
Plan per calendar year, and (iii) the number and/or class of
securities and the exercise price per share in effect under each
outstanding option under the Plan. Such adjustments to the
outstanding options are to be effected in a manner which shall
preclude the enlargement or dilution of rights and benefits under
such options. The adjustments determined by the Plan Administrator
shall be final, binding and conclusive.
ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM
I. OPTION TERMS
Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; PROVIDED, however, that each such document
shall comply with the terms specified below. Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.
A. EXERCISE PRICE.
1. The exercise price per share shall be fixed by the Plan
Administrator but shall not be less than eighty-five percent (85%) of the Fair
Market Value per share of Common Stock on the option grant date, provided that
the Plan Administrator may fix the exercise price at less than 85% if the
optionee, at the time of the option grant, shall have made a payment to the
Company (including payment made by means of a salary reduction) equal to the
excess of the Fair Market Value of the Common Stock on the option grant date
over such exercise price.
3
2. The exercise price shall become immediately due upon
exercise of the option and may, subject to the provisions of Section I of
Article Four and the documents evidencing the option, be payable in one or more
of the forms specified below:
(i) cash or check made payable to the Corporation,
(ii) with respect to the exercise of options after the
Section 12 Registration Date, shares of Common Stock held for the
requisite period necessary to avoid a charge to the Corporation's earnings
for financial reporting purposes and valued at Fair Market Value on the
Exercise Date, or
(iii) with respect to the exercise of options for
vested shares after the Section 12 Registration Date and to the extent the
sale complies with all applicable laws relating to the regulation and sale
of securities, through a special sale and remittance procedure pursuant to
which the Optionee shall concurrently provide irrevocable written
instructions to (a) a Corporation-designated brokerage firm to effect the
immediate sale of the purchased shares and remit to the Corporation, out
of the sale proceeds available on the settlement date, sufficient funds to
cover the aggregate exercise price payable for the purchased shares plus
all applicable Federal, state and local income and employment taxes
required to be withheld by the Corporation by reason of such exercise, and
(b) the Corporation to deliver the certificates for the purchased shares
directly to such brokerage firm in order to complete the sale.
Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
B. EXERCISE AND TERM OF OPTIONS. Each option shall be exercisable
at such time or times, during such period and for such number of shares as
shall be determined by the Plan Administrator and set forth in the documents
evidencing the option. However, no option shall have a term in excess of ten
(10) years measured from the option grant date.
C. EFFECT OF TERMINATION OF SERVICE.
1. The following provisions shall govern the exercise of any
options held by the Optionee at the time of cessation of Service or death:
(i) Any option outstanding at the time of the Optionee's
cessation of Service for any reason shall remain exercisable for such
period of time thereafter as shall be determined by the Plan Administrator
and set forth in the documents evidencing the option (which shall in no
event be less than six (6) months in the case of death or disability nor
less than thirty (30) days in the case of any other cessation of Service),
provided no such option shall be exercisable after the expiration of the
option term.
(ii) Any option exercisable in whole or in part by the
Optionee at the time of death may be subsequently exercised by the
personal representative of the Optionee's estate or by the person or
persons to whom the option is transferred pursuant to the Optionee's will
or in accordance with the laws of descent and distribution.
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(iii) Subject to clause C.2.(ii) below of this Section
I, during the applicable post-Service exercise period, the option may not
be exercised in the aggregate for more than the number of vested shares
for which the option is exercisable on the date of the Optionee's
cessation of Service. Upon the expiration of the applicable exercise
period or (if earlier) upon the expiration of the option term, the option
shall terminate and cease to be outstanding for any vested shares for
which the option has not been exercised.
2. The Plan Administrator shall have complete discretion,
exercisable either at the time an option is granted or at any time while the
option remains outstanding, to:
(i) extend the period of time for which the option is to
remain exercisable following the Optionee's cessation of Service from the
limited exercise period otherwise in effect for that option to such
greater period of time as the Plan Administrator shall deem appropriate,
but in no event beyond the expiration of the option term, and/or
(ii) permit the option to be exercised, during the
applicable post-Service exercise period, not only with respect to the
number of vested shares of Common Stock for which such option is
exercisable at the time of the Optionee's cessation of Service but also
with respect to one or more additional installments in which the Optionee
would have vested had the Optionee continued in Service.
D. STOCKHOLDER RIGHTS. The holder of an option shall have no
stockholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become a
holder of record of the purchased shares.
E. REPURCHASE RIGHTS. The Plan Administrator shall have the
discretion to grant options which are exercisable for unvested shares of Common
Stock and to reserve the right to repurchase any or all of those unvested
shares should the optionee thereafter cease to be in Service to the
Corporation. The terms upon which such repurchase right shall be exercisable
(including the period and procedure for exercise and the appropriate vesting
schedule for the purchased shares) shall be established by the Plan
Administrator and set forth in the document evidencing such repurchase right.
F. LIMITED TRANSFERABILITY OF OPTIONS. During the lifetime of the
Optionee, options shall be exercisable only by the Optionee and shall not be
assignable or transferable other than by will or by the laws of descent and
distribution following the Optionee's death.
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Section II, all the
provisions of Articles One, Two and Four shall be applicable to Incentive
Options. Options which are specifically designated as Non-Statutory Options
when issued under the Plan shall NOT be subject to the terms of this Section
II.
A. ELIGIBILITY. Incentive Options may only be granted to
Employees.
5
B. EXERCISE PRICE. The exercise price per share shall not be less
than one hundred percent (100%) of the Fair Market Value per share of Common
Stock on the option grant date.
C. DOLLAR LIMITATION. The aggregate Fair Market Value of the
shares of Common Stock (determined as of the respective date or dates of grant)
for which one or more options granted to any Employee under the Plan (or any
other option plan of the Corporation or any Parent or Subsidiary) may for the
first time become exercisable as Incentive Options during any one calendar year
shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the
extent the Employee holds two (2) or more such options which become exercisable
for the first time in the same calendar year, the foregoing limitation on the
exercisability of such options as Incentive Options shall be applied on the
basis of the order in which such options are granted.
D. 10% STOCKHOLDER. If any Employee to whom an Incentive Option is
granted is a 10% Stockholder, then the exercise price per share shall not be
less than one hundred ten percent (110%) of the Fair Market Value per share of
Common Stock on the option grant date, and the option term shall not exceed
five (5) years measured from the option grant date.
III. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at any
time and from time to time, with the consent of the affected option holders,
the cancellation of any or all outstanding options under the Discretionary
Option Grant Program and to grant in substitution new options covering the same
or different number of shares of Common Stock but with an exercise price per
share based on the Fair Market Value per share of Common Stock on the new grant
date.
ARTICLE THREE
STOCK ISSUANCE PROGRAM
I. STOCK ISSUANCES
Shares of Common Stock may be issued under the Stock Issuance Program
through direct and immediate issuances without any intervening option grants.
Each such stock issuance shall be evidenced by a Stock Issuance Agreement which
complies with the terms specified below.
II. STOCK ISSUANCE TERMS
A. PURCHASE PRICE.
1. The purchase price per share shall be fixed by the Plan
Administrator, but shall not be less than eighty-five percent (85%) of the Fair
Market Value per share of Common Stock on the issuance date.
6
2. Subject to the provisions of Section I of Article Four,
shares of Common Stock may be issued under the Stock Issuance Program for any
of the following items of consideration which the Plan Administrator may deem
appropriate in each individual instance:
(i) cash or check made payable to the Corporation, or
(ii) past services rendered to the Corporation (or any
Parent or Subsidiary).
B. VESTING PROVISIONS.
1. Shares of Common Stock issued under the Stock Issuance
Program may, in the discretion of the Plan Administrator, be fully and
immediately vested upon issuance or may vest in one or more installments over
the Participant's period of Service or upon attainment of specified performance
objectives. The elements of the vesting schedule applicable to any unvested
shares of Common Stock issued under the Stock Issuance Program, namely:
(i) the Service period to be completed by the Participant
or the performance objectives to be attained,
(ii) the number of installments in which the shares are to
vest,
(iii) the interval or intervals (if any) which are to
lapse between installments, and
(iv) the effect which death, Permanent Disability or other
event designated by the Plan Administrator is to have upon the vesting
schedule,
shall be determined by the Plan Administrator and incorporated into the Stock
Issuance Agreement.
2. Any new, substituted or additional securities or other
property (including money paid other than as a regular cash dividend) which the
Participant may have the right to receive with respect to the Participant's
unvested shares of Common Stock by reason of any stock dividend, stock split,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation's
receipt of consideration shall be issued subject to (i) the same vesting
requirements applicable to the Participant's unvested shares of Common Stock
and (ii) such escrow arrangements as the Plan Administrator shall deem
appropriate.
3. The Participant shall have full stockholder rights with
respect to any shares of Common Stock issued to the Participant under the Stock
Issuance Program, whether or not the Participant's interest in those shares is
vested. Accordingly, the Participant shall have the right to vote such shares
and to receive any regular cash dividends paid on such shares.
4. Should the Participant cease to remain in Service while
holding one or more unvested shares of Common Stock issued under the Stock
Issuance Program or
7
should the performance objectives not be attained with respect to one or more
such unvested shares of Common Stock, then those shares shall be immediately
surrendered to the Corporation for cancellation, and the Participant shall
have no further stockholder rights with respect to those shares. To the
extent the surrendered shares were previously issued to the Participant for
consideration paid in cash or cash equivalent (including the Participant's
purchase-money indebtedness), the Corporation shall repay to the Participant
the cash consideration paid for the surrendered shares and shall cancel the
unpaid principal balance of any outstanding purchase-money note of the
Participant attributable to the surrendered shares.
5. The Plan Administrator may in its discretion waive the
surrender and cancellation of one or more unvested shares of Common Stock which
would otherwise occur upon the cessation of the Participant's Service or the
non-attainment of the performance objectives applicable to those shares. Such
waiver shall result in the immediate vesting of the Participant's interest in
the shares as to which the waiver applies. Such waiver may be effected at any
time, whether before or after the Participant's cessation of Service or the
attainment or non-attainment of the applicable performance objectives.
ARTICLE FOUR
MISCELLANEOUS
I. FINANCING
The Plan Administrator may permit any Optionee or Participant to pay
the option exercise price under the Discretionary Option Grant Program or the
purchase price of shares issued under the Stock Issuance Program by delivering
a full-recourse, interest bearing promissory note payable in one or more
installments. The terms of any such promissory note (including the interest
rate and the terms of repayment) shall be established by the Plan Administrator
in its sole discretion. In no event may the maximum credit available to the
Optionee or Participant exceed the sum of (i) the aggregate option exercise
price or purchase price payable for the purchased shares plus (ii) any Federal,
state and local income and employment tax liability incurred by the Optionee or
the Participant in connection with the option exercise or share purchase.
II. SHARE ESCROW/LEGENDS
Unvested shares issued under the Plan may, in the Plan
Administrator's discretion, be held in escrow by the Corporation until the
Participant's interest in such shares vests or may be issued directly to the
Participant with restrictive legends on the certificates evidencing those
unvested shares.
III. CORPORATE TRANSACTION
A. Except as otherwise provided in the agreements evidencing an
option, a portion of each outstanding option under the Discretionary Option
Grant Program shall automatically accelerate in the event of a Corporate
Transaction so that such portion shall, immediately prior to the effective
date of the Corporate Transaction, become fully exercisable
8
for vested shares of Common Stock, provided that no portion of any
outstanding option shall so accelerate if and to the extent: (i) such option
is, in connection with the Corporate Transaction, either to be assumed by the
successor corporation (or parent thereof) or to be replaced with a comparable
option to purchase shares of the capital stock of the successor corporation
(or parent thereof), (ii) such option is to be replaced with a cash incentive
program of the successor corporation which preserves the spread existing on
the unvested option shares at the time of the Corporate Transaction and
provides for subsequent payout in accordance with the same vesting schedule
applicable to those option shares or (iii) the acceleration of such option is
subject to other limitations imposed by the Plan Administrator at the time of
the option grant. The determination of option comparability under clause (i)
above shall be made by the Plan Administrator, and its determination shall be
final, binding and conclusive. The portion of the option which will
automatically accelerate hereunder shall be a number of shares equal to the
number of unvested shares immediately prior to the Corporate Transaction
available under the option multiplied by a fraction, the NUMERATOR of which
is the number of complete months of which elapsed after the vesting
commencement date under the option and the date of the Corporate Transaction,
and the DENOMINATOR of which is the number of months required under the
option agreement for the rights of the optionee to become fully vested.
B. Except as otherwise provided in the agreements creating the
repurchase rights, outstanding repurchase rights, if any, shall terminate
automatically with respect to a portion of the shares subject to repurchase
rights, and the shares of Common Stock subject to those terminated rights
shall immediately vest in full, in the event of any Corporate Transaction,
provided that such repurchase right shall not lapse to the extent: (i) those
repurchase rights are to be assigned to the successor corporation (or parent
thereof) in connection with such Corporate Transaction or (ii) such
accelerated vesting is precluded by other limitations imposed by the Plan
Administrator at the time the option is issued or the repurchase right is
created. The portion of the shares with respect to which the repurchase
rights will terminate shall be a number of shares equal to the total number
of shares subject to repurchase rights immediately prior to the Corporate
Transaction multiplied by a fraction, the NUMERATOR of which is the number of
complete months which elapsed after the vesting commencement date under the
option or stock issuance agreement pursuant to which the shares were issued
and the date of the Corporate Transaction, and the DENOMINATOR of which is
the number of months required under the option or stock issuance agreement
for the rights of the optionee to become fully vested. Any and all repurchase
rights which will not terminate at the time of the Corporate Transaction may
be exercised by the Company immediately prior to the Corporate Transaction.
C. Immediately following the consummation of the Corporate
Transaction, all outstanding options shall terminate and cease to be
outstanding, except to the extent assumed by the successor corporation (or
parent thereof).
D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction
had the option been exercised immediately prior to such Corporate
Transaction. Appropriate adjustments to reflect such Corporate Transaction
shall also be made to (i) the exercise price payable per share under each
outstanding option, PROVIDED the aggregate exercise price payable for such
securities shall remain the same, (ii) the maximum
9
number and/or class of securities available for issuance over the remaining
term of the Plan and (iii) the maximum number and/or class of securities for
which any one person may be granted stock options, separately exercisable
stock appreciation rights and direct stock issuances under the Plan per
calendar year.
E. Repurchase rights which are assigned in connection with a
Corporate Transaction shall be exercisable with respect to the property
issued to the Optionee of Participant upon consummation of such Corporate
Transaction in exchange for the Common Stock held by the Optionee or
Participant subject to the repurchase rights immediately prior to the
Corporate Transaction.
F. Except as otherwise limited by the Plan Administrator at the
time an Option is granted, vesting under outstanding options will
automatically accelerate in the event the Optionee's Service subsequently
terminates by reason of an Involuntary Termination within twenty-four (24)
months following the effective date of any Corporate Transaction in which
those options are assumed or replaced and do not otherwise accelerate. Any
options so accelerated shall remain exercisable for fully-vested shares until
the EARLIER of (i) the expiration of the option term or (ii) the expiration
of the one (1)-year period measured from the effective date of the
Involuntary Termination. The portion of any Incentive Option accelerated in
connection with a Corporate Transaction or Hostile Change in Control shall
remain exercisable as an Incentive Option only to the extent the applicable
One Hundred Thousand Dollar limitation is not exceeded and the provisions
governing the exercise and holding period are met. To the extent such dollar
limitation is exceeded, the accelerated portion of such option shall be
exercisable as a Non-Statutory Option under the Federal tax laws.
G. Except as otherwise limited by the Plan Administrator at the
time the option is granted under the Discretionary Option Program or the
repurchase rights are created, the outstanding repurchase rights with respect
to shares held by an Optionee or Participant will automatically lapse and
cease to be exercisable in the event the Optionee's or the Participant's
Service subsequently terminates by means of an Involuntary Termination within
twenty-four (24) months following the effective date of any Corporate
Transaction in which those repurchase rights are assigned or otherwise
continue.
H. The outstanding options or repurchase rights shall in no way
affect the right of the Corporation to adjust, reclassify, reorganize or
otherwise change its capital or business structure or to merge, consolidate,
dissolve, liquidate or sell or transfer all or any part of its business or
assets.
IV. HOSTILE CHANGE IN CONTROL
A. In the event of any Hostile Change in Control, each
outstanding option under the Discretionary Option Grant Program shall
automatically accelerate so that each such option shall, immediately prior to
the effective date of the Hostile Change in Control, become fully exercisable
with respect to the total number of shares of Common Stock at the time
subject to such option and may be exercised for any or all of those shares as
fully-vested shares of Common Stock.
10
B. Outstanding repurchase rights, if any, shall terminate
automatically, and the shares of Common Stock subject to those terminated
rights shall immediately vest in full, in the event of any Hostile Change in
Control.
V. VESTING
Notwithstanding any other provision of this agreement, the vesting
schedule imposed with respect to any option grant or share issuance shall not
result in the Optionee or Participant vesting in fewer than 20% per year for
five years from the date of the option grant or share issuance.
VI. TAX WITHHOLDING
A. The Corporation's obligation to deliver shares of Common Stock
upon the exercise of options or the issuance or vesting of such shares under
the Plan shall be subject to the satisfaction of all applicable Federal, state
and local income and employment tax withholding requirements.
B. The Plan Administrator may, in its discretion, provide any or
all holders of Non-Statutory Options or unvested shares of Common Stock under
the Plan with the right to use shares of Common Stock in satisfaction of all or
part of the Taxes incurred by such holders in connection with the exercise of
their options or the vesting of their shares. Such right may be provided to
any such holder in either or both of the following formats:
STOCK WITHHOLDING: The election to have the Corporation
withhold, from the shares of Common Stock otherwise issuable upon the exercise
of such Non-Statutory Option or the vesting of such shares, a portion of those
shares with an aggregate Fair Market Value equal to the percentage of the Taxes
(not to exceed one hundred percent (100%)) designated by the holder.
STOCK DELIVERY: The election to deliver to the Corporation, at
the time the Non-Statutory Option is exercised or the shares vest, one or more
shares of Common Stock previously acquired by such holder (other than in
connection with the option exercise or share vesting triggering the Taxes) with
an aggregate Fair Market Value equal to the percentage of the Taxes (not to
exceed one hundred percent (100%)) designated by the holder.
VII. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan shall become effective immediately upon the Plan
Effective Date. Options may be granted under the Discretionary Option Grant at
any time on or after the Plan Effective Date. However, no options granted
under the Plan may be exercised, and no shares shall be issued under the Plan,
until the Plan is approved by the Corporation's stockholders. If such
stockholder approval is not obtained within twelve (12) months after the Plan
Effective Date, then all options previously granted under this Plan shall
terminate and cease to be outstanding, and no further options shall be granted
and no shares shall be issued under the Plan.
11
B. The Plan shall terminate upon the EARLIEST of (i) the tenth
anniversary of the Plan Effective Date, (ii) the date on which all shares
available for issuance under the Plan shall have been issued as fully-vested
shares or (iii) the termination of all outstanding options in connection with a
Corporate Transaction. Upon such plan termination, all outstanding option
grants and unvested stock issuances shall thereafter continue to have force and
effect in accordance with the provisions of the documents evidencing such
grants or issuances.
VIII. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and authority
to amend or modify the Plan in any or all respects. However, no such amendment
or modification shall adversely affect the rights and obligations with respect
to stock options or unvested stock issuances at the time outstanding under the
Plan unless the Optionee or the Participant consents to such amendment or
modification. In addition, certain amendments may require stockholder approval
if so determined by the Board or pursuant to applicable laws or regulations.
B. Options to purchase shares of Common Stock may be granted under
the Discretionary Option Grant and shares of Common Stock may be issued under
the Stock Issuance Program that are in each instance in excess of the number of
shares then available for issuance under the Plan, provided any excess shares
actually issued under those programs shall be held in escrow until there is
obtained any required approval of an amendment sufficiently increasing the
number of shares of Common Stock available for issuance under the Plan. If
such approval is not obtained within twelve (12) months after the date the
first such excess issuances are made, then (i) any unexercised options granted
on the basis of such excess shares shall terminate and cease to be outstanding
and (ii) the Corporation shall promptly refund to the Optionees and the
Participants the exercise or purchase price paid for any excess shares issued
under the Plan and held in escrow, together with interest (at the applicable
Short Term Federal Rate) for the period the shares were held in escrow, and
such shares shall thereupon be automatically cancelled and cease to be
outstanding.
IX. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of shares
of Common Stock under the Plan shall be used for general corporate purposes.
X. REGULATORY APPROVALS
A. The implementation of the Plan, the granting of any stock option
under the Plan and the issuance of any shares of Common Stock (i) upon the
exercise of any granted option or (ii) under the Stock Issuance Program shall
be subject to the Corporation's procurement of all approvals and permits
required by regulatory authorities having jurisdiction over the Plan, the stock
options granted under it and the shares of Common Stock issued pursuant to it.
B. No shares of Common Stock or other assets shall be issued or
delivered under the Plan unless and until there shall have been compliance with
all applicable requirements of Federal and state securities laws, including the
filing and effectiveness of the Form S-8 registration statement for the shares
of Common Stock issuable under the Plan, and all applicable
12
listing requirements of any stock exchange (or the Nasdaq National Market, if
applicable) on which Common Stock is then listed for trading.
XI. NO EMPLOYMENT/SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee or the Participant
any right to continue in Service for any period of specific duration or
interfere with or otherwise restrict in any way the rights of the Corporation
(or any Parent or Subsidiary employing or retaining such person) or of the
Optionee or the Participant, which rights are hereby expressly reserved by
each, to terminate such person's Service at any time for any reason, with or
without cause.
XII. FINANCIAL REPORTS
The Corporation shall deliver a balance sheet and an income statement
at least annually to each individual holding an outstanding option under the
Plan, unless such individual is a key Employee whose duties in connection with
the Corporation (or any Parent or Subsidiary) assure such individual access to
equivalent information.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
13
APPENDIX
The following definitions shall be in effect under the Plan:
A. BOARD shall mean the Corporation's Board of Directors.
B. CODE shall mean the Internal Revenue Code of 1986, as amended.
C. COMMON STOCK shall mean the Corporation's common stock.
D. CORPORATE TRANSACTION shall mean either of the following
stockholder-approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities possessing
more than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or
persons different from the persons holding those securities immediately
prior to such transaction, or
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets.
E. CORPORATION shall mean Rhythms NetConnections Inc., a Delaware
corporation, and its successors.
F. DISCRETIONARY OPTION GRANT PROGRAM shall mean the discretionary
option grant program in effect under the Plan.
G. EMPLOYEE shall mean an individual who is in the employ of the
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.
H. EXERCISE DATE shall mean the date on which the Corporation shall
have received written notice of the option exercise.
I. FAIR MARKET VALUE per share of Common Stock on any relevant date
shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be deemed equal to the
closing selling price per share of Common Stock on the date in question,
as such price is reported on the Nasdaq National Market or any successor
system. If there is no closing selling price for the Common Stock on the
date in question, then the Fair Market Value shall be the closing selling
price on the last preceding date for which such quotation exists.
(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be deemed equal to the closing
selling price per share of Common Stock on the date in question on the
Stock Exchange determined by the Plan
14
Administrator to be the primary market for the Common Stock, as such
price is officially quoted in the composite tape of transactions on such
exchange. If there is no closing selling price for the Common Stock on
the date in question, then the Fair Market Value shall be the closing
selling price on the last preceding date for which such quotation exists.
(iii) For purposes of any option grants made on the
Underwriting Date, the Fair Market Value shall be deemed to be equal to
the price per share at which the Common Stock is to be sold in the initial
public offering pursuant to the Underwriting Agreement.
(iv) For purposes of any option grants made prior to the
Underwriting Date, the Fair Market Value shall be determined by the Plan
Administrator, after taking into account such factors as it deems
appropriate.
J. HOSTILE CHANGE IN CONTROL shall mean a change in ownership or
control of the Corporation effected through either of the following
transactions:
(i) the acquisition, directly or indirectly by any person or
related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by, or is under common
control with, the Corporation), of beneficial ownership (within the
meaning of Rule 13d-3 of the 0000 Xxx) of securities possessing more than
fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities pursuant to a tender or exchange
offer made directly to the Corporation's stockholders which the Board does
not recommend such stockholders to accept, or
(ii) a change in the composition of the Board over a period of
thirty-six (36) consecutive months or less such that a majority of the
Board members ceases, by reason of one or more contested elections for
Board membership, to be comprised of individuals who either (A) have been
Board members continuously since the beginning of such period or (B) have
been elected or nominated for election as Board members during such period
by at least a majority of the Board members described in clause (A) who
were still in office at the time the Board approved such election or
nomination.
K. INCENTIVE OPTION shall mean an option which satisfies the
requirements of Code Section 422.
L. INVOLUNTARY TERMINATION shall mean the termination of the
Service of any individual which occurs by reason of:
(i) such individual's involuntary dismissal or discharge by the
Corporation for reasons other than Misconduct, or
(ii) such individual's voluntary resignation following (A) a
change in his or her position with the Corporation which materially
reduces his or her level of responsibility, (B) a reduction in his or her
level of compensation (including base salary,
15
fringe benefits and participation in any corporate-performance based
bonus or incentive programs) by more than fifteen percent (15%) or (C) a
relocation of such individual's place of employment by more than fifty
(50) miles, provided and only if such change, reduction or relocation is
effected by the Corporation without the individual's consent.
M. MISCONDUCT shall mean the commission of any act of fraud,
embezzlement or dishonesty by the Optionee or Participant, any unauthorized use
or disclosure by such person of confidential information or trade secrets of
the Corporation (or any Parent or Subsidiary), or any other intentional
misconduct by such person adversely affecting the business or affairs of the
Corporation (or any Parent or Subsidiary) in a material manner. The foregoing
definition shall not be deemed to be inclusive of all the acts or omissions
which the Corporation (or any Parent or Subsidiary) may consider as grounds for
the dismissal or discharge of any Optionee, Participant or other person in the
Service of the Corporation (or any Parent or Subsidiary).
N. 1934 ACT shall mean the Securities Exchange Act of 1934,
as amended.
O. NON-STATUTORY OPTION shall mean an option not intended to
satisfy the requirements of Code Section 422.
P. OPTIONEE shall mean any person to whom an option is granted
under the Discretionary Option Grant Program.
Q. PARENT shall mean any corporation (other than the Corporation)
in an unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
R. PARTICIPANT shall mean any person who is issued shares of Common
Stock under the Stock Issuance Program.
S. PERMANENT DISABILITY OR PERMANENTLY DISABLED shall mean the
inability of the Optionee or the Participant to engage in any substantial
gainful activity by reason of any medically determinable physical or mental
impairment expected to result in death or to be of continuous duration of
twelve (12) months or more.
T. PLAN shall mean the Corporation's 1997 Stock Option/Stock
Issuance Plan, as set forth in this document.
U. PLAN ADMINISTRATOR shall mean the particular entity, whether
the Primary Committee, the Board or the Secondary Committee, which is
authorized to administer the Discretionary Option Grant and Stock Issuance
Programs with respect to one or more classes of eligible persons, to the
extent such entity is carrying out its administrative functions under those
programs with respect to the persons under its jurisdiction.
V. PLAN EFFECTIVE DATE shall mean the date on which the Plan was
adopted by the Board.
16
W. PRIMARY COMMITTEE shall mean the committee of two (2) or more
non-employee Board members appointed by the Board to administer the
Discretionary Option Grant and Stock Issuance Programs with respect to
Section 16 Insiders following the Section 12 Registration Date.
X. SECONDARY COMMITTEE shall mean a committee of two (2) or more
Board members appointed by the Board to administer any aspect of Plan not
required hereunder to be administered by the Primary Committee. The members
of the Secondary Committee may be Board members who are Employees eligible to
receive discretionary option grants or direct stock issuances under the Plan
or any other stock option, stock appreciation, stock bonus or other stock
plan of the Corporation (or any Parent or Subsidiary).
Y. SECTION 12 REGISTRATION DATE shall mean the date on which the
Common Stock is first registered under Section 12(g) or Section 15 of the
1934 Act.
Z. SECTION 16 INSIDER shall mean an officer or director of the
Corporation subject to the short-swing profit liabilities of Section 16 of
the 1934 Act.
AA. SERVICE shall mean the performance of services for the
Corporation (or any Parent or Subsidiary) by a person in the capacity of an
Employee, a non-employee member of the board of directors or a consultant or
independent advisor, except to the extent otherwise specifically provided in
the documents evidencing the option grant or stock issuance.
BB. STOCK EXCHANGE shall mean either the American Stock Exchange
or the New York Stock Exchange.
CC. STOCK ISSUANCE AGREEMENT shall mean the agreement entered into
by the Corporation and the Participant at the time of issuance of shares of
Common Stock under the Stock Issuance Program.
DD. STOCK ISSUANCE PROGRAM shall mean the stock issuance program
in effect under the Plan.
EE. SUBSIDIARY shall mean any corporation (other than the
Corporation) in an unbroken chain of corporations beginning with the
Corporation, provided each corporation (other than the last corporation) in
the unbroken chain owns, at the time of the determination, stock possessing
fifty percent (50%) or more of the total combined voting power of all classes
of stock in one of the other corporations in such chain.
FF. TAXES shall mean the Federal, state and local income and
employment tax liabilities incurred by the holder of Non-Statutory Options or
unvested shares of Common Stock in connection with the exercise of those
options or the vesting of those shares.
GG. 10% STOCKHOLDER shall mean the owner of stock (as determined
under Code Section 424(d)) possessing more than ten percent (10%) of the
total combined voting power of all classes of stock of the Corporation (or
any Parent or Subsidiary).
HH. UNDERWRITING AGREEMENT shall mean the agreement between
the
17
Corporation and the underwriter or underwriters managing the initial
public offering of the Common Stock.
II. UNDERWRITING DATE shall mean the date on which the Underwriting
Agreement is executed and priced in connection with an initial public offering
of the Common Stock.
18
